Houston: ConocoPhillips, the third-largest US oil company, said it sees global costs for energy developments continuing to spiral up, rising at an annual rate of 8% to 10% and squeezing profit margins.
Labour scarcity and soaring prices for steel, concrete and other materials are inflating costs of building everything from refining units to offshore production platforms and show no signs of abating, ConocoPhillips chief executive officer Jim Mulva said on Thursday in an interview in Houston.
“When we look out over the 2008, 2009, 2010 time period, we continue to see some, hopefully not double digits, but pretty high single-digit inflation numbers for projects from year to year,” Mulva said. The cost outlook excludes the company’s onshore projects in Canada and the US, he said.
Chevron Corp and other oil companies are being forced to reconsider projects made marginal by cost pressures. Houston-based ConocoPhillips cut 2007 spending plans in Canada by $1bn and, to a lesser extent, scaled back its drilling programme in the US. Now, well costs are dropping or rising at a slower rate in Canada and the US, Mulva said.
ConocoPhillips last month said it will delay expansions at three US refineries and has said high costs may prevent it from participating in a new refinery project in the UAE.
Mulva said producers have to commit to contracts for some services and equipment far in advance because of the energy industry’s labour and materials shortages.
“In many cases you have to put in the order, you have 24 to 36 months waiting time,” Mulva said. “So it continues to look like a strong market around the world in the service industry, and continued strong cost pressures, escalation, maybe not as much as we’ve seen in the past but still an escalation.”
Whether the world gets the energy infrastructure it needs now or later may depend on the willingness of oil companies to lower their expectations for investment returns, said Ted Harper, who helps manage $8bn in assets, including 415,000 ConocoPhillips shares, at Frost Bank in Houston.
“The industry is trying to walk what has become a very fine line between meeting the demand globally while also maintaining, or attempting to maintain, historical levels of returns in an atmosphere of much higher costs,” Harper said. “Either they incrementally lower the rate-of-return bar on some of these projects, or they start to cancel some” until oil and gas prices go higher.
International crude and natural-gas producers such as ConocoPhillips and ExxonMobil also are facing higher costs because access to the relatively inexpensive reserves in foreign lands is being reduced by the growing independence of state oil companies, Mulva said.
In the Middle East, the cost of finding and developing new reserves can run around $5 per barrel of oil, he said. Companies have recently reported finding and developing costs in the more mature, harder-to-tap US basins of close to $20 a barrel.
Even with high development costs, oil companies can do well at today’s energy prices, Mulva said. Projects can’t be budgeted based on prices near their peak, he said.
“We don’t expect that what we see today is going to continue,” Mulva said. “And so if you use more modest expectations, given the cost structure and all, then what you’re looking at is lower returns than we would have expected in the past.” – Bloomberg |
