Big Oil is up against rampant cost inflation. Energy bosses at an industry shindig in Houston this week agreed that a doubling of labour and equipment prices over the past decade is their biggest headwind. The trouble is that cutting costs is likely to dent future output.
Total Chief Executive Christophe de Margerie, speaking at the CERAWeek conference, said large drillers could "no longer be the deep pocket" they have been in the past. Chevron's John Watson conceded that the industry had been caught off guard by rising costs, and BHP Billiton's Andrew Mackenzie said inflation was the biggest enemy.
Even the 126 per cent increase in global drilling and exploration costs in 10 years, as estimated by IHS CERA, doesn't do justice to the problem faced by some in the industry. The price of offshore equipment has climbed fivefold in the same period. Inflation has been worse in energy hot spots like Brazil and Australia.
De Margerie proposed turning the screws on contractors and subcontractors, while Mackenzie of BHP said a go-slow approach to investment is part of the answer. These approaches might help at the margin, but the central cost problem isn't so easily tractable.
That's because it stems not from over-generous pricing but from actual shortages of skilled labour and equipment and high prices for raw materials. For example, the median age of the sector's special breed of scientists rose to around 58 in 2012 from 43 in 2000, according to IHS analysts, after oil companies kept recruitment to a minimum in the 1980s and 1990s. Experience is now expensive. Suppliers to Big Oil aren't in any better position to change that than their customers.
Nor can the industry do much about pricier steel, for example. And cutting back on investment could exacerbate another problem for the biggest energy companies: stagnant output. Over the past five years, Exxon Mobil has managed to boost production by only 1 percent as capital spending has surged 56 per cent.
Returns on capital employed at large oil companies have halved since 2008 to around 15 percent, despite high crude prices, IHS reckons. Cutting costs ought to help in theory, but in fact may only squelch production and therefore revenue and potentially profit. For now, the oil CEOs look stuck with a less lucrative business than they are used to.
Total Chief Executive Christophe de Margerie, speaking at the CERAWeek conference, said large drillers could "no longer be the deep pocket" they have been in the past. Chevron's John Watson conceded that the industry had been caught off guard by rising costs, and BHP Billiton's Andrew Mackenzie said inflation was the biggest enemy.
Even the 126 per cent increase in global drilling and exploration costs in 10 years, as estimated by IHS CERA, doesn't do justice to the problem faced by some in the industry. The price of offshore equipment has climbed fivefold in the same period. Inflation has been worse in energy hot spots like Brazil and Australia.
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That's because it stems not from over-generous pricing but from actual shortages of skilled labour and equipment and high prices for raw materials. For example, the median age of the sector's special breed of scientists rose to around 58 in 2012 from 43 in 2000, according to IHS analysts, after oil companies kept recruitment to a minimum in the 1980s and 1990s. Experience is now expensive. Suppliers to Big Oil aren't in any better position to change that than their customers.
Nor can the industry do much about pricier steel, for example. And cutting back on investment could exacerbate another problem for the biggest energy companies: stagnant output. Over the past five years, Exxon Mobil has managed to boost production by only 1 percent as capital spending has surged 56 per cent.
Returns on capital employed at large oil companies have halved since 2008 to around 15 percent, despite high crude prices, IHS reckons. Cutting costs ought to help in theory, but in fact may only squelch production and therefore revenue and potentially profit. For now, the oil CEOs look stuck with a less lucrative business than they are used to.