Rising development costs push up oil futures curve

By Matthew Robinson - Analysis

NEW YORK (Reuters) - Rising costs for oil companies are driving up prices for crude oil futures through 2016, keeping supplies struggling to match growing oil demand outside the United States.

Despite worries a potential recession could clip U.S. demand, forecasts for increases from other OECD nations and emerging markets like China should counter tepid growth in the world's top energy consumer.

The increase in consumption will come as increasing finding and development costs trim supply growth from energy companies, according to experts, driving up price expectations over the next few years.

"The continued strength of long-dated prices amid ongoing industry cost inflation poses, in our opinion, the strongest upside risk to our forecast," Goldman Sachs said in a report.

After trading around $70 a barrel for much of 2007, longer-dated crude oil futures on the New York Mercantile Exchange began to surge in September as front-month crude started its run to a record $100.09 hit in early January.

With near-month crude futures now holding above $90 a barrel, U.S. oil contracts from November 2008 and beyond are now trading in a range from $89 to $85 a barrel, flattening the curve in later months as short-term factors compete to tug front-month prices higher and lower.

Analysts said the rise in part reflects the rising costs energy companies must pay to pump oil in producer nations within and without OPEC. Countries such as Venezuela and Russia, flush with profits from high oil prices, have tightened contract terms for access to their vast, low-cost reserves.

In addition, mature fields are producing and requiring more investment to maintain output, while rising labor and material costs are also bolstering company expenses.

"The hopes for a flood of supply in the next several years appear unlikely to happen, particularly when looking at rising demand from the emerging-market economies," said John Kilduff, senior vice president of MF Global.

HIGHER COSTS

Energy firms must now concentrate greater resources on more expensive plays in deepwater offshore regions and nontraditional areas such as the Canadian oil sands.

Oil company finding and development costs, which averaged $11.38 per barrel of oil equivalent in 2003-2005, rose to $17.23 for the 2004-2006 period, according to U.S. Energy Information Administration data.

Those costs may jump another 50 percent by 2010, experts said, supporting prices for long-dated futures.

"Continuing cost increases being reported by companies for 2007 along with spotty reserve additions suggest that finding and development costs could quickly be headed toward $25 a barrel," Deutsche Bank said in a report.

Concerns that weak U.S. demand growth could damp overall OECD consumption could also prompt OPEC to keep a rein on production, supporting prices for crude.