Opinion
- Editorial- Commentary
STCIC:
Rising costs, energy sector competitiveness
Over the last five years the costs of goods and
services required to explore for, develop and produce
hydrocarbons have increased dramatically. The cost
side of the oil and gas industry, however, receives
little media and public attention as compared to
the prices these commodities fetch in the international
market.
T&T
is not immune from the international trend of
inflation in the oil and gas industry. It is
important, however, to recognise that increasing
costs have not occurred uniformly across the energy
sector and that higher prices do not necessarily
mean higher profitability for all energy service
companies.
Indeed the data supplied to the STCIC by our member
energy service companies suggests that many of
the companies in the sector have held down their
selling prices while, at the same time, having
to cope with increased costs.
Rising costs in the global upstream business
The cost of producing a barrel of oil varies according
to geography and geology. Cambridge Energy Research
Associates (Cera) estimates that the lowest cost
province in the world is Saudi Arabia where the
cost to produce a barrel of oil is roughly US$4.
The highest cost area in the world is the Gulf
of Mexico where it cost on average US$25 to produce
a barrel of oil. Some of the drivers of cost in
the global energy business include demand for energy
services and the maturity of the province in question.
It is generally assumed that as a province matures
the cost of exploration and production increases.
Cera has, however, pointed to what they see as
a deceleration in the rate of increase of cost.
According to Cera, exploration and production cost
increased by seven per cent for the six months
ending March 31, 2007.
For the previous six month period the increase
in cost was 13 per cent. In 2006, the annual rate
of project inflation was 30 per cent. Cera notes
that based on this trend it is possible that a
cost plateau may be reached in 2008.
Cera also notes that rising capital costs are
now as important as other widely recognised oil
and gas issues such as world market trends, geopolitics,
globalisation and new technologies. They add that
an oil price in excess of US$55 a barrel is required
to maintain confidence that projects will prove
worthy from an economic standpoint.
Cera’s vice president, David Hobbs, will
be the keynote speaker at the T&T Petroleum
Conference (TTPC) which will be held from February
25 to 26, at the Hilton Trinidad and Conference
Centre. His keynote address will focus on the Future
of Energy.
Cera’s views are endorsed by Platts who
have commented that inflation is “endemic
in the oil and gas supply chain.” This inflationary
pressure is related to the increased demand for
energy services which is stretched to capacity.
International oil and gas consultants Wood McKenzie
have also noted that the average return on investment
(ROI) for exploration of hydrocarbons in the past
three years was less than 15 per cent. This was
based on the assumption of US$70 a barrel.
Wood
McKenzie also found that amount spent per well
during exploration work had risen by 60 per
cent since 2004. One of the major costs associated
with drilling an exploration well is the day rate
for the drilling rig. An indication of day rates
for various classifications of rigs can be obtained
on Rigzone. The day rate for a semi-submersible
rig ranges from US$259,000 to US$294,000 a day
depending on the depth of water in which the rig
is required to operate. Global Santa Fe’s
Summary of Current Offshore Rig Economics (SCORE)
reflects current rig day rates as a per cent of
the estimated rate required to justify building
new rigs on speculation.
For September 2007, this index was 139 and had
experienced a 220 per cent increase in the last
five years.
Rising
costs have also impacted on the world’s
largest oil company Exxon Mobil. For the third
quarter of 2007, Exxon Mobil reported that its
US$9.4 billion in profits had fallen short of expectations
(ten per cent less than the profits in Q3 2006).
One of the reasons proffered by Exxon Mobil for
its Q3 2007 profits not meeting expectations was
the cost of finding and producing oil.
Cost
in the T&T upstream sub-sector
The
impact of cost on the energy sector of T&T
was emphasised by bpTT CEO and chairman, Robert
Riley, when he addressed an STCIC energy luncheon
last November. Riley announced that costs in bpTT
had quadrupled over the last four years. He further
noted that the companies that managed costs effectively
would “steer the course.”
The consumption of energy services constitutes
a major cost for upstream oil companies. The data
in the table below is taken from the STCIC quarterly
Energy Service Sector Survey (ESSS). The data indicate
that the increasing cost in the local energy services
sector have not been matched by a commensurate
increase in prices.
In fact the percentage of energy service companies
reporting an increase in prices has decreased.
The majority of companies surveyed by the ESSS
are local energy services companies. The message
from the data is that local energy service companies
have in the main been keeping prices competitive
while costs have been increasing. A large component
of cost for service companies is human resource
cost which has also experienced significant increases
in the past four years.
According to Central Statistical Office data presented
at TTPC 2007, the employee related component of
the total value added was more than 30 per cent
for energy service companies, compared to an average
of just 7.5 per cent for the energy sector as a
whole. This means that energy service companies
are more exposed to increasing employee costs that
other more capital-intensive sectors of the oil
and gas economy.
Central Statistical Office (CSO) data on gross
domestic product (GDP) in the energy services sector
supports the STCIC ESSS findings of limited increases
in overall income in the energy services sector
over the past couple of years.
The
data on GDP in the energy services sector—which
more or less corresponds to company income—indicate
a sharp contraction in the sector between 2004
and 2005 (a period of limited exploration activity
in T&T) followed by fast growth into 2006 and
limited growth through 2007.
The CSO and STCIC ESSS data suggests that the
increase in costs reported internationally and
locally by the major purchasers of goods and services
has not been fully reflected in increased income
by the service companies surveyed by the CSO.
One
possible reason for this disparity could be that
newer entrants to the T&T market have
gained a significant share of business in the sector
and these newer entrants may not yet be picked-up
in the CSO survey data.
Whatever
the reason, it is important for the major customers,
local energy service companies and the
Government to fully understand the economics of
the energy services sector in order to ensure that
appropriate measures and policies are put in place
to both control costs and to ensure that maximum
value is returned to the overall economy and society
of T&T. The future of the energy services sector
will be a major issue of discussion at the TTPC
2008.
Further information on TTPC 2008 is available
at www.stcic.org
STCIC is
South Trinidad Chamber of Industry and Commerce.
Petroleumworld not necessarily share
these views.
Editor's
Note: This article was first publish
in Trinidad Guardian, Thursday 31st January, 2008
. Petroleumworld reprint this article in the interest
of our readers.
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Petroleumworld
02/03 /07
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