Drilling for oil starts to pay as price soars
Drilling for oil starts to pay as price soars >> .:thebusinessonline.com:.
By : Richard Orange October 09, 2005
SEARCHING for oil has become one of the most profitable things anybody can do. The ramp-up in the oil price is raising hopes that the industry might start putting its money where its mouth is. This may lead to greater emphasis on exploration rather than cost-cutting or buying other oil companies.
A study by oil consultants Wood Mackenzie has modelled the effect of oil prices on the profitability of exploration. Assuming they could sell the oil they have discovered for $40 a barrel, the best explorers would have made returns of more than 20% on every dollar they have ploughed into finding new oil supplies over the past 10 years.
Even the worst performers out of the 28 top international oil firms surveyed would have made a 12% return.
When the first version of the study, Exploration Strategy and Performance, was released two years ago, it made waves in the oil industry by showing that the bottom ranks among oil companies were destroying value when they tried to find more oil. Given the level of discoveries and their costs today, Wood Mackenzie says, at a $20 oil price, two thirds of the companies would be destroying value.
Increased exploration is crucial to stave off a decline in global production and a steady concentration of pricing power in the hands of the Opec oil cartel.
Over the last decade, the six largest oil companies have drilled fewer wells. They slashed their budgets in 1999 after the oil price collapsed to $10. Even now, they haven’t increased them back to 1998’s level. The top six only account for two fifths of the oil exploration; before they accounted for two-thirds.
The result has been a collapse in the industry’s ability to replace the oil it sells, with the companies only finding half as much as they need. Wood Mackenzie estimates that to replace all of it, they’d need to increase spending on exploration from today’s $14bn (£8.0bn, E11.6bn) to $40bn. True, they’ve spent 30% more since the oil price started to climb, but almost every cent is swallowed by higher costs of hiring equipment, manpower and services.
Laid next to the $85bn the top five oil companies have spent buying back shares since 2000, that hardly looks like heavy spending.
Even if exploration increases, it is unlikely to triple to the levels needed to stop reserves declining. After all, part of the reason oil companies have been making good returns from exploration is because they have been doing less of it. BP, the most successful, has excelled because it only explores in the most prospective regions. Surprisingly, Royal Dutch Shell, plagued by problems with reserve replacement, came second in terms of profitability. No completely new oil hotspot has been discovered since 2000, when a string of finds was made off Angola.
Also, after a decade of cutting back, there aren’t enough drilling rigs or engineers for a doubling of exploration, however much cash companies pay. Investment in rigs is on the rise; around 30 new drilling rigs are being built. But that’s hardly enough to remove the bottleneck.
By : Richard Orange October 09, 2005
SEARCHING for oil has become one of the most profitable things anybody can do. The ramp-up in the oil price is raising hopes that the industry might start putting its money where its mouth is. This may lead to greater emphasis on exploration rather than cost-cutting or buying other oil companies.
A study by oil consultants Wood Mackenzie has modelled the effect of oil prices on the profitability of exploration. Assuming they could sell the oil they have discovered for $40 a barrel, the best explorers would have made returns of more than 20% on every dollar they have ploughed into finding new oil supplies over the past 10 years.
Even the worst performers out of the 28 top international oil firms surveyed would have made a 12% return.
When the first version of the study, Exploration Strategy and Performance, was released two years ago, it made waves in the oil industry by showing that the bottom ranks among oil companies were destroying value when they tried to find more oil. Given the level of discoveries and their costs today, Wood Mackenzie says, at a $20 oil price, two thirds of the companies would be destroying value.
Increased exploration is crucial to stave off a decline in global production and a steady concentration of pricing power in the hands of the Opec oil cartel.
Over the last decade, the six largest oil companies have drilled fewer wells. They slashed their budgets in 1999 after the oil price collapsed to $10. Even now, they haven’t increased them back to 1998’s level. The top six only account for two fifths of the oil exploration; before they accounted for two-thirds.
The result has been a collapse in the industry’s ability to replace the oil it sells, with the companies only finding half as much as they need. Wood Mackenzie estimates that to replace all of it, they’d need to increase spending on exploration from today’s $14bn (£8.0bn, E11.6bn) to $40bn. True, they’ve spent 30% more since the oil price started to climb, but almost every cent is swallowed by higher costs of hiring equipment, manpower and services.
Laid next to the $85bn the top five oil companies have spent buying back shares since 2000, that hardly looks like heavy spending.
Even if exploration increases, it is unlikely to triple to the levels needed to stop reserves declining. After all, part of the reason oil companies have been making good returns from exploration is because they have been doing less of it. BP, the most successful, has excelled because it only explores in the most prospective regions. Surprisingly, Royal Dutch Shell, plagued by problems with reserve replacement, came second in terms of profitability. No completely new oil hotspot has been discovered since 2000, when a string of finds was made off Angola.
Also, after a decade of cutting back, there aren’t enough drilling rigs or engineers for a doubling of exploration, however much cash companies pay. Investment in rigs is on the rise; around 30 new drilling rigs are being built. But that’s hardly enough to remove the bottleneck.
posted by Marcel at 2:04 PM
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