Skip to comments.Rising costs eat into returns even with high oil prices, IHS says
Posted on 07/01/2014 5:26:19 AM PDT by thackney
Oil producers are making less for the capital theyre spending than they did a decade ago, when U.S. benchmark crude prices were below $30 a barrel, a new report concludes.
A study of more than 80 oil companies showed they made an average 8.6 percent in returns on average capital employed last year, and 11 percent in 2012 both lower than exploration-and-production returns in 2001, according to a report released Friday by IHS.
The price of West Texas Intermediate crude climbed from $27 a barrel in 2001 to $98 a barrel last year.
My guess is that shareholders are asking, What gives? said Nicholas Cacchione, a lead researcher for cost and energy performance for IHS, said in a written statement. The culprit is cost escalation.
Lifting costs, the amount of money it takes to extract the oil and gas from the ground, have quadrupled over the years, to $21 a barrel.That includes the cost of labor, transportation, supplies, pumps, and other expenses.
And the cost to find and develop oil is now another $22 a barrel, as land prices, the cost of hydraulic fracturing and drilling have climbed. In addition, the amount that federal and other governments take through taxes and other measures have jumped to 60 percent of pre-tax profits last year, up from 49 percent in 2000.
While returns have increased in recent years, costs have accelerated at a rate that has squeezed margins. The more than $60-per-barrel increase in global oil prices since 2002 has been offset by significantly higher costs, and to a lesser degree, weaker U.S. natural gas prices. Margins have basically been frozen, Cacchione said.
Still, larger integrated oil companies have seen higher profits, even as they peel back spending, said Lysle Brinker, director of company research at IHS.
As shareholders decry high spending, bigger oil companies have increased their focus on the most profitable projects, he said. Returns are expected to increase as large projects come online this year, he said.
As a result of this ongoing cost pressure, companies are increasingly laser-focused on cost containment and exercising greater discipline around the return on their capital investments, Brinker said in a statement. There is greater scrutiny on capital spending at all levels, which will become even more pronounced as the year progresses.
It seems to me ANY new venture costs a lot up front, doesn't return much in the beginning, but eventually smoothes out to profitability.
I expect my royalty checks to fluctuate for a time but eventually level off somewhere way below what I initially received (starting to decrease even now, just a few months into it)
Much of the high cost is due (in my opinion) to the “boom”.
High demand makes for high prices. Labor, materials, equipment, etc. There just is not enough available for what the companies want to spend and when.
Projects are being delayed due to so many happening at the same time raises the cost to the point it makes more sense for some of them to wait.
I think if you’d stayed at a Holiday Inn Express, you would be able to call yourself a financial wizard! ;-)
And you are 100% correct. What used to cost me 3 mil is now running around 4.5 mil, that’s when I can get them on the ranch. 20% lifting costs, 6,5% severance tax on oil and gas, 35% corporation tax, 15% dividend tax, property tax and another 8.3 percent should I decide to spend any of that money.
6,5% severance tax on oil and gas, 35% corporation tax, 15% dividend tax, property tax
Thanks for sharing