Daily Management Review

Oil producers doubled production costs


Major oil companies reported a drop in revenue in the fourth quarter of last year. However, many executives of oil companies still retain an optimistic attitude.

Oil prices have stabilized, and cost-cutting measures implemented in the last three years should enable the companies to make a profit.

The fall in oil prices has forced big companies to cut back on exploration costs, reduce the part of employees, postpone planned projects and seek more effective solutions.

This allowed to reduce breakeven point for oil projects. However, this may be a temporary factor, given that the service companies now need higher costs for drilling. 

In some cases, price increases should go over 20%. As a result, surge in oil production can be marked for the first time in a few years. Rystad Energy believes that cost of an average project to produce shale oil could rise to $ 1.60 per barrel, up to $ 36.50.

Yet, it’s not all doom and gloom. In the end, these break-even prices are still much lower than they were in 2014.

Reuters collected a series of graphs depicting the fall of the cost of production of shale oil in different parts of the United States. The agency shows that virtually every major shale basin has faced a double drop in break-even price since 2013.

This fact, however, solely relates to shale drilling. Bulk of the oil major oil companies is not engaged in shale oil production.

Some of the major oil companies have made some progress in reducing costs over the past few years. Yet, the new report casts doubt on their past achievements.

According to new research of Apex Consulting Ltd., major oil companies keep overspending on production of a barrel of oil equivalent. Apex presented index, which measures the price pressure on supermajors - a group of leading manufacturers, including ExxonMobil, Royal Dutch Shell, BP, Chevron Corporation, ConocoPhillips and Total.

The index suggests that in 2015 supermajors spent on development 66% more compared to 2011.

This fact clashes with widely advertised "increased efficiency", allegedly implemented during the market downturn. Almost all measures taken by the companies related to "development costs" rather than exploration or operating costs.

However, development costs of Eni fell by 32% in the period from 2011 to 2015, which is a significant achievement. Chevron and ExxonMobil have also taken some efficient steps, albeit at a more modest figure than Eni.

Chevron’s costs fell by 6%, and spending of Exxon decreased by 5% over five years. On the other hand, development costs of Royal Dutch Shell rose four times. ConocoPhillips and BP have been doing only slightly better, costs rose by about half over the period. In general, the supermajors’ development costs have increased by 66% to $ 18.39 per barrel.

The index marks the main structural increase in development costs given a wider production.

This figure may seem rather insignificant at $ 18 per barrel. However, this applies only to "development costs", which account for only a little more than half of the total expenses of companies.

This figure does not include costs of exploration, as well as financing of current operations. Thus, the "break-even price", which is often cited in the media, is factually not much higher. BP, for example, recently admitted that its financial condition will not break even until oil trading results climb higher than $ 60 per barrel.

Now supermajors are in a difficult position. They are trying to cut costs to improve their finances and pay off a huge pile of debt that they have accumulated over the past few years.

However, their stocks will decline unless they manage to replace them. Exxon, for example, can replace 67% of the oil produced in 2015 year.

In addition, as noted by Apex Consulting, service companies may require higher prices in the future, as it increases amount of work done by drilling. In other words, the cost reduction carried out after 2014 is, at least partially, cyclical. Costs will rise again, as the workload will increase. This scenario will come true if the oil producers fail to communicate with their suppliers to address underlying structural costs to produce oil. 

source: oilprice.com