Big Oil frets over rising costs, tough access
HOUSTON (Reuters) - Surging oil prices have brought energy companies record profits in recent years. But the boom has also pushed up the cost of doing business and emboldened oil-producing nations to restrict access to their reserves.
Oil industry executives and insiders speaking at Cambridge Energy Research Associates' conference in Houston this week highlighted the dwindling access to reserves and rising production costs as top challenges for the industry as it seeks to raise output to match growing global energy demand.
"It's hard not to see some trouble ahead," said John Watson, president of Chevron Corp.'s (CVX.N) international exploration and production business.
As oil prices have increased, resource-rich countries like Venezuela, Bolivia and Russia have tightened their grip on their nations' oil and gas assets, shrinking the pool of available reserves for international oil companies like Exxon Mobil Corp. (XOM.N) and BP Plc (BP.L).
Around 80 percent of the world's discovered oil is held by state oil companies.
"Demand will be there and the resources are in the ground. However, on the supply side, countries including our own are inhibiting our ability to meet that demand," Watson said.
Major oil companies have recently struggled to replace their production, and many analysts believe that the companies can better expand their reserves through deals with national oil companies than with the drill bit.
"All the host countries are tightening the terms and increasing taxes and royalties to increase their take, and that takes its toll," said Howard Weil, analyst Gene Gillespie. "But most companies are willing to accept that expenditure."
National oil companies are looking to sacrifice less of their profits, especially in those projects that require little risk or expense, said Peter Nolan, who is in charge of exploration and production long-term renewal at BP.
International oil companies "tend to be needed only on the energy frontier. (They) have the capacity to manage risks and drive down costs through technology," he said.
Exxon Mobil Chief Executive Rex Tillerson suggested that the relationship between international oil companies and oil-producing nations is evolving.
Still, he said "the role of international oil companies has always been to demonstrate what value we can bring to a country's natural resources ... and that's the role that we will continue to play."
According to CERA, oil and gas production costs are up 67 percent since 2000, and 30 percent in the past year alone, on high demand for steel, drilling rigs and other materials used in production.
Moreover, Candida Scott, director of research for CERA's capital costs analysis forum, projects that costs will continue to rise around 8 to 12 percent.
"There's no relief in our marketplaces coming along in 2007 that is going to allow those costs to stop increasing," she said.
The high costs are already taking a toll on oil and gas companies. In December, ConocoPhillips cut its 2007 spending plan as the company's chief executive, Jim Mulva, said higher costs meant the company should demonstrate greater discipline.
Chevron's CEO, David O'Reilly, also said that some projects currently under consideration need to be re-evaluated due to the high-cost environment.
"I have no doubt (high costs are) going to slow some of the decision processes," he said, speaking at the CERA conference.
Jack Hartung, Chevron's manager of benchmarking and cost engineering, said there is no simple solution to managing costs in the oil industry due to strong demand.
After analyzing what oil companies could do to manage their expenses, Hartung said the answer was simply, "Not much."
(Additional reporting by Bruce Nichols in Houston)
- Tweet this
- Share this
- Digg this