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This "Silent Killer" Is Spreading in Oil

This

More evidence is emerging that the petroleum industry is staring down a big issue.

Rising costs.

Numbers released by industry group Oil & Gas U.K. last week show that the country's offshore sector is being hit by higher expenses. The organization said that operating costs across the U.K. petroleum sector rose by 15.5% in 2013. To a total of $14.8 billion.

That's a significant number. Especially in light of the relatively small scale of the U.K. offshore industry--where total capital expenditures in 2013 totalled only $24 billion.

The per-barrel figures around operating costs in the offshore here are even more alarming. Average unit opex hit $28 per barrel in 2013. And the number of fields with operating costs over $50 per barrel increased by 100%.

This is the same pattern we're seeing in oil and gas basins worldwide. Costs for services, parts and labor are accelerating quickly. Year-end financials being released by E&P firms are confirming that 2013 may well have been the most expensive year on record for the industry.

Such rising costs are a "silent killer" for the business. Capital efficiency in the industry has in fact been on the decline over the last couple of years. With rising costs making it difficult for developers to turn money spent in the ground into a positive return, in terms of reserves value added.

That's not something a lot of investors noticed last year. But it's starting to become headline news. All of the super-majors reported weaker earnings for 2013--largely driven by increased costs.

The most concerning thing is that groups like Oil & Gas U.K. don't see the problem getting better anytime soon. In fact, the organization is forecasting that operating expenses for its member companies will increase again in 2014, by nearly 10%.

This is a time for E&Ps (and their investors) to be very prudent with budgets. Chasing expensive acquisitions in hot plays could be a recipe for disaster, amid falling returns on drilling and development.

Oil prices are still good--so the industry isn't going away by any means. But being successful today means being a contrarian and looking for out-of-the-way plays that offer fewer bottlenecks and more cost savings.

Here's to breaking the silence,

By Dave Forest




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