Rising Capital Costs Bear Down on E&P Profitability
Higher oil and gas prices have encouraged a wave of new investments for discovering and developing resources. However, the soaring costs of exploration and production (E&P) programs and the volatility of energy prices have left many producers uneasy about future profit margins. CERA has undertaken new research to quantify how capital costs are affecting project economics in today's markets.
* E&P capital costs are accelerating and have increased approximately 42 percent from 2000 to 2005 (third quarter) compared with a 15 percent rise in the Consumer Price Index.
* Increasing costs and energy price volatility are having an impact on investments. Oil and gas projects that were profitable at $22 per barrel in 2002 now require $35 per barrel to achieve similar returns.
* A macro view of costs using a capital cost index can serve as a useful tool to manage risk and provide an industry benchmark for tracking portfolio performance and structuring contracts.
