The laws of economics are not as certain as the laws of physics, but if we ignore them and substitute liberal political rhetoric instead, we remain ignorant of the cause-effect relationships that effect our lives. Supply-demand, the costs of regulation, labor, and capital infrastructure, market uncertainty…all of these go into the price we pay at the pump. Too bad so few Americans understand this. Link is here.
Big Oil reinvests big profits to tap costlier reserves
By Patrice Hill
THE WASHINGTON TIMES
August 8, 2006
Big Oil’s record profits attract attention and outrage, but an independent study has found that oil companies do exactly what economic textbooks say they should do with all that money: They invest it in oil exploration and development efforts that eventually should relieve pressure on prices.
The top 20 U.S. and Canadian oil companies actually invested 50 percent more than they earned in the past 10 years in efforts to produce more oil, but adverse geopolitical developments conspired to give them fewer opportunities to expand production while fading oil fields in the U.S. and elsewhere forced them to spend substantially more just to maintain current production, according to the study by the Ernst & Young accounting firm.
"Reinvestment is under way, and it’s strong," said Charles Swanson, an energy analyst at the firm, but "average costs to find and develop oil and gas reserves have tripled since 1997, while total reserve-replacement costs have more than doubled."
The study found that the top companies — including Exxon Mobil, ConocoPhillips and Chevron, among others — took in a mind-numbing $5 trillion in revenue from sales of oil and related products between 1995 and 2005. After subtracting the cost of equipment, leases, labor and other operating expenses, the companies posted whopping profits of $336 billion.
Over the same time span, however, the companies spent even more than they earned — $550 billion — on oil exploration and development. Some of them went deeply into debt to finance new ventures, especially during times of lean profits.
Despite the massive sums of money oil companies spent trying to find more oil for the world’s fuel-thirsty consumers, returns on investment over the past 10 years declined sharply because most existing oil fields in the West are in decline and the most promising new discoveries are not available for development, Ernst & Young found.
Nevertheless, the study found that oil companies continued to invest steadily, even during busts like 1998, when the price of premium crude plummeted to $10 a barrel, as well as during boom times like today, when prices are topping $77.
"Investments are long-term and fraught with geopolitical, regulatory, environmental and general economic risks," said Mr. Swanson of Ernst & Young. In the U.S., promising oil fields in Alaska and offshore are not open for development, while the vast petroleum reserves in Canada’s Athabasca oil sands require huge amounts of energy and money to bring to market.
"Most of the new reserves are outside of North America, and much of the global reserve base is off-limits to Western oil and gas companies," said Mr. Swanson. Moreover, oil-rich countries such as Venezuela and Russia are exacting onerous licensing terms and costly royalty payments from Western companies seeking access.
Getting permission to drill for oil is only the beginning when it comes to delivering gasoline to the pump.
"Once a discovery is made and years are invested in preparation, planning and navigating the regulatory maze, companies often find themselves faced with a shortage of drilling rigs, equipment and people to operate them," Mr. Swanson said.
The Ernst & Young study, which was not done on behalf of any client firms, confirms what the oil companies have been saying about the high cost and difficulty of exploiting the world’s remaining petroleum reserves. Other analyses, such as one by Cambridge Energy Research Associates, also have tracked the soaring costs for drilling equipment and skilled workers.
Cambridge found that the average cost of finding, developing and producing oil worldwide has jumped 35 percent to $9.13 a barrel since 2002. The highest-cost oil to produce, such as Canada’s oil sands, now costs $25 a barrel to deliver to consumers compared to $14.50 in 2002, Cambridge found, attributing the sharply higher costs to exploding demand for oil, as well as a tight market for drilling equipment and workers.
Petroleum Industry Research Foundation Inc. said high demand for workers drove up average wage gains for oil-industry employees to 10 percent last year, more than double the national average, while price increases for oil and gas machinery accelerated to 11 percent this year from 3 percent in 2004.
After Hurricanes Katrina and Rita devastated rigs in the Gulf of Mexico last fall, the price of replacing deep-water drilling equipment doubled, the group said.
A shortage of petroleum engineers has prevented some companies from expanding production. Worker shortages developed in recent years after drastic job cuts during industry downsizings in the early part of the decade. Moreover, most of the engineers available are baby boomers, with an average age of 49, and are heading toward retirement, said Jeff Johnson, chief executive of Cano Petroleum, an independent oil producer in Fort Worth, Texas.
"There’s an urgent need to find a new generation of U.S. petroleum engineers to replace this present one" if the United States is to continue exploiting its dwindling oil fields, he said. "Very few people know there are hundreds of mature oil fields here in the U.S. containing ample amounts of oil and natural gas that was never recovered due to technological limitations" — a lack of equipment and skilled workers.
