Untitled Document
Untitled Document

IHS: Escalating costs driving diminishing returns for oil and gas companies despite stronger oil prices

IHS

Despite stronger oil prices, corporate returns on average capital employed (ROACE) are lower than in 2001, when oil prices were less than $30 per barrel, according to research from information and insight provider IHS (NYSE: IHS).

“Our IHS study, which assessed energy company performance and capital returns, included more than 80 oil and gas companies,” said Nicholas D. Cacchione, director at IHS Energy and a lead researcher on cost and energy company performance. “Collectively, these companies averaged an 11% ROACE in 2012 and 8.6% in 2013, both of which are weaker than the ROACE achieved in 2001 when the WTI (West Texas intermediate) crude oil price hovered at just under $27 per barrel. The WTI crude oil price averaged $94 per barrel in 2012 and $98 per barrel in 2013.”

Said Cacchione, “My guess is that shareholders are asking ‘What gives?’ The culprit is cost escalation. 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.”

Looking at the upstream sector, which comprises the majority of business of the study universe; lifting costs have more than quadrupled since 2000 to greater than $21 per barrel. Finding and developing costs have followed a similar trajectory, reaching nearly $22 per barrel of oil equivalent (BOE) in 2013. Government fiscal take (based on financial disclosure), which excludes the impact of royalty volumes in the upstream sector, increased from 49% of pretax profits in 2000, to 60% in 2013.

“The integrated oil companies earned a 15 percent ROACE since 2000, which is substantially higher than the 11% posted by pure E&P (exploration and production) companies,” said Lysle R. Brinker, director of company research at IHS Energy. “The outperformance by the integrated oil companies can largely be attributed to their geographically and functionally diversified portfolios, which benefit from capital spending programs that are generally more disciplined. They are also aided by the lower-cost basis of the legacy assets that often comprise a large portion of their operations.”

“As a result of this ongoing cost pressure,” Brinker said, “companies are increasingly laser-focused on cost containment and exercising greater discipline around the return on their capital investments. There is greater scrutiny on capital spending at all levels, which will become even more pronounced as the year progresses. Every investment has to pass muster on several fronts before it will be funded, since there is significant internal competition for that capital.”

 

Related Articles

GlobalData: Pemex monopoly could deter new competitors

07/11/2014 Despite the imminent phased introduction to a fully deregulated market, new companies wishing to enter Mexico’s downstream oil space will have a difficult time overcoming the existing monopoly held...

UK National Grid predicts UK shale gas could meet third of demand by 2030s

07/10/2014 The UK’s National Grid believes that a third of Britain's gas needs could come from its own shale gas by the early 2030s if government policies and economic growth allow firms to invest in gas expl...

Energy consortium project marks first step in enhanced oil recovery

07/10/2014

An energy industry consortium set up to tackle the challenge of enhancing oil recovery from reservoirs has started with a kick-off meeting for its plan of action.

EIA: Six formations responsible for surge in Permian production

07/09/2014 The Permian Basin in Texas and New Mexico is the nation's most prolific oil producing area. Six formations within the basin have provided the bulk of Permian's 60% increase in oil output since 2007.

Commission: Oil & gas industry at critical crossroads

07/08/2014 In the UK, the Independent Expert Commission on Oil & Gas has determined that radical fiscal and regulatory change is an absolute necessity to ensure that the remaining hydrocarbons on the UK C...

More Oil & Gas Financial Articles

GlobalData: Pemex monopoly could deter new competitors

Fri, Jul 11, 2014

Despite the imminent phased introduction to a fully deregulated market, new companies wishing to enter Mexico’s downstream oil space will have a difficult time overcoming the existing monopoly held by state-owned Pemex, according to GlobalData.

UK National Grid predicts UK shale gas could meet third of demand by 2030s

Thu, Jul 10, 2014

The UK’s National Grid believes that a third of Britain's gas needs could come from its own shale gas by the early 2030s if government policies and economic growth allow firms to invest in gas exploration, Reuters reports.

Energy consortium project marks first step in enhanced oil recovery

Thu, Jul 10, 2014

An energy industry consortium set up to tackle the challenge of enhancing oil recovery from reservoirs has started with a kick-off meeting for its plan of action.

EIA: Six formations responsible for surge in Permian production

Wed, Jul 9, 2014

The Permian Basin in Texas and New Mexico is the nation's most prolific oil producing area. Six formations within the basin have provided the bulk of Permian's 60% increase in oil output since 2007.

Commission: Oil & gas industry at critical crossroads

Tue, Jul 8, 2014

In the UK, the Independent Expert Commission on Oil & Gas has determined that radical fiscal and regulatory change is an absolute necessity to ensure that the remaining hydrocarbons on the UK Continental Shelf are fully exploited in order to deliver the maximum economic contribution to the nation.

Most Popular

Oil & Gas Jobs

Search More Job Listings >>
Subscribe to OGFJ