Summary
The Rig zone Newsletter of June 5 reported that two cost indices released by the IHS Cambridge Energy Research Associates reversed a series of cost escalations. Upstream Capital Cost Index fell 8.5% over the last six months. The Operating Cost Index fell 8%. These are measures of cost changes that can be considered similar to the Consumer Price Index. The CERA indices are calculated against prices for the year 2000. Daniel Yergin, IHS CERA chairman noted that the first signs of falling costs were evident in November and December of 2008. Reduction of capital cost was driven by reduced activity. Reduction in operating costs resulted from a fall off in construction activity and lower levels of resource utilization. Transportation and consumables were lower priced. A sharp decline in steel and subsea equipment was seen. Lead times have decreased and costs of well servicing fell. While the number of projects declined, offshore operating costs remained higher because of sustained activity.
Analysis
The international companies are the main beneficiaries, especially those with a focus on crude oil projects. Unhappily, prices of natural gas have not recovered and look set to remain low for the rest of 2009. At $3.50/million btus, many shale gas projects have stopped completely. Those shale gas companies that continue to drill are being much more selective in the choice of location with the Haynesville shale considerably out in front because of high initial productivity. But it is true that drilling rig day rates are down and it they continue falling, new shale gas activity may result. Several shale gas drillers have profitable hedge positions that will keep them in the black for all of 2009 and part of 2010. This too, combined with lower costs, encourages drilling. Crude oil prices, which hit a low in February of 2009, have steadily moved higher and are now close to $70/bbl. The combination of lower capital costs and lower operating costs makes a signal difference in the economics of new developments proving that the major’s assessment of the worldwide financial situation and how the industry would react was correct. All of them can look forward to better earnings reports for the second quarter of 2009. The independents are still pondering the recent changes both in costs and in prices. For many of them, the concern is the balance sheet. Some have to prepare for debt repayment on bonds coming due in 2010 and later years. That plus the uncertainty of price trends means that they will not likely increase capital spending until 2010. All operators large and small continue to put pressure on drilling contractors and service companies to lower prices. Large capital budget reductions have caused layoffs by contractors and service companies and this in turn has led to lower costs. Most observers think the downward trend in costs will continue for some time. Some Canadian oil sands producers are already thinking about resuming new development in 2010. With OPEC members yearning for prices higher than those existing today to resolve domestic budgetary shortfalls, it seems likely that they will be reluctant to make further production cuts. Still they are not likely to cut further because of international criticism in the face of the severe financial crisis. All of these factors, taken in conjunction with the natural decline of black oil production from worldwide mature oil fields indicates that the oil and gas industry will recover its poise much faster than world economies in general.
