Free Republic
Browse · Search
News/Activism
Topics · Post Article

Skip to comments.

Rising costs eat into returns even with high oil prices, IHS says
Fuel Fix ^ | June 30, 2014 | Collin Eaton

Posted on 07/01/2014 5:26:19 AM PDT by thackney

Oil producers are making less for the capital they’re 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.”


TOPICS: News/Current Events
KEYWORDS: cost; energy; oil

1 posted on 07/01/2014 5:26:19 AM PDT by thackney
[ Post Reply | Private Reply | View Replies]

To: thackney
I'm no financial wizard, nor do I play one on TV ... and I didn't stay at Holiday Inn last night .. but ..

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)

2 posted on 07/01/2014 5:44:17 AM PDT by knarf (I say things that are true .. I have no proof .. but they're true.)
[ Post Reply | Private Reply | To 1 | View Replies]

To: knarf

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.


3 posted on 07/01/2014 5:48:53 AM PDT by thackney (life is fragile, handle with prayer)
[ Post Reply | Private Reply | To 2 | View Replies]

To: thackney

Thanx


4 posted on 07/01/2014 5:57:25 AM PDT by knarf (I say things that are true .. I have no proof .. but they're true.)
[ Post Reply | Private Reply | To 3 | View Replies]

To: knarf

I think if you’d stayed at a Holiday Inn Express, you would be able to call yourself a financial wizard! ;-)


5 posted on 07/01/2014 6:14:22 AM PDT by b4its2late (A Progressive is a person who will give away everything he doesn't own.)
[ Post Reply | Private Reply | To 2 | View Replies]

To: thackney

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 posted on 07/01/2014 7:01:22 AM PDT by Dusty Road
[ Post Reply | Private Reply | To 3 | View Replies]

To: Dusty Road

6,5% severance tax on oil and gas, 35% corporation tax, 15% dividend tax, property tax

BTTT

Thanks for sharing


7 posted on 07/01/2014 7:10:32 AM PDT by thackney (life is fragile, handle with prayer)
[ Post Reply | Private Reply | To 6 | View Replies]

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.

Free Republic
Browse · Search
News/Activism
Topics · Post Article

FreeRepublic, LLC, PO BOX 9771, FRESNO, CA 93794
FreeRepublic.com is powered by software copyright 2000-2008 John Robinson