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Financial Times: Cost of search for energy reserves soars

By Carola Hoyos in London
Published: September 21 2006

The costs of finding additional reserves of oil and gas have soared, an industry study shows, adding to the malaise of international oil companies.

“Reserves replacement costs surged 73 per cent as increased capital spending did not translate into incremental reserve additions,” a study of 200 oil and gas companies found.

The world’s proved reserves of oil and gas rose just 2 per cent to 257.7bn barrels, while production increased 1 per cent to just shy of 19bn barrels, the authors of the study, John S. Herold, the Houston-based research company, and Harrison Lovegrove, the London advisers, found.

While development costs rose $37bn, or 30 per cent, to $159bn in 2005, they yielded just a 1 per cent increase in output.

“They are spending 30 per cent more just to stand still,” said Rodney Schmidt, managing director at Harrison Lovegrove. “The money has been there, but the barrels have not.”

Companies spent $36bn on exploration in 2005. That meant that in 2005 the industry as a whole spent more money producing that extra 1 per cent of oil and gas than it spent exploring for the reserves that will feed the world’s economic growth in the years and decades to come.

Part of the reason is that companies are denied access to most of the world’s biggest oil and gas fields. Instead, they are having to embark on ever more ambitious, risky and costly projects as nations rich in oil and gas, such as Mexico and Saudi Arabia, are keeping their doors closed to foreign investment.

Meanwhile, growing numbers of countries in which international oil companies operate are wresting back control over the projects. This week Russian authorities moved to halt work on Royal Dutch Shell’s Sakhalin II project by withdrawing an environmental permit.

Meanwhile, in Europe and the US in particular oil companies are coming under much scrutiny because of their surging revenues, which jumped 37 per cent to $699bn in 2005 for the 200 companies in the survey. But the companies’ costs are rising even faster, meaning that a fall in the oil price would put profit margins under serious pressure, analysts warned.

“Even if oil prices remain at prices we have seen recently, we expect pressure on margins,” said Mr Schmidt. “It matters to the shareholder ultimately as it puts dividends and share buybacks under pressure.”

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