A look at costs for a few of the larger US-focused E&P companies

What are really the costs in the Eagleford, Bakken, and Permian basins?  There is a notion that the oil majors are well insulated from a decline in oil prices, mainly because of their diversification.  There is some truth to this, but the oil major’s business model is in some risk as well.  The tight oil players (“shale”) do have high costs compared to projects in the past. 

What we see here is that costs are apparently in the range of $33 to $48 per bbl among the mid-size to larger domestic-only E&P companies.  If we assume that oil cost substantially more to produce than gas, lets say that costs are about $40-$50 including DD&A.  If we look at the highest cost producer according to this chart, Whiting Petroleum, we can chart costs over the past few years.

I apologize for this eye chart here, but the key thing to see that the component of the costs that has increased is mostly the DD&A item.  This is depreciation, a non-cash cost.  It is curious that by many measures capital efficiency has been increasing dramatically in the Bakken during this period.  In terms of both EIA's metrics like "new production per active rig" and in terms of the companies' own claims about higher estimated ultimate recoveries based on improved hydraulic fracturing technology, it is likely that actual capital efficiency, in terms of oil that will ultimately be produced per $ of capital expense, is increasing.  But while capital efficiency is actually increasing (or so I believe), it looks like it is decreasing based on the metric DD&A per barrel of production (in the case of Whiting anyway).  I think the reason for this is that annual capex has more than doubled between 2010 and 2014, and has increased at a faster rate than production.  Due to their aggressive depreciation policies, the increased capex leads to higher depreciation per barrel produced.  If they were to pull back on their capex (which might be prudent in the current environment) costs on a per-barrel basis should decline significantly.  Also, as cost become more of a focus, instead of production growth, I anticipate greater capital efficiency from all of these companies.  Production taxes, which are proportional to oil prices, should decline as well.  In a lower price environment, I think you could see per bbl cost decline significantly in the major plays.  

It is also worthwhile to take a cursory look at the offshore "mega" projects, and DD&A per BOE rates already comparable to the E&P companies.

Here's a look at a few:

Stampede: US Gulf of Mexico.  Hess, Chevron, Statoil, Nexen.  $6b capex for 300mm bbl recoverable is $18/bbl.  That is before the inevitable cost overruns.

Hebron: Offshore Canada.  Exxon and Chevron’s Hebron project off shore Canada is now expected to cost $14b for 700mm bbl of recoverable resource.  This equates to about $20 capex per estimated recoverable bbl.

Kashagan: Eni, Royal Dutch Shell, Total- Kazakhstan Caspian Sea.  This project has already cost an astounding $50b, and has been 14 years in the making.  Phase 1 was originally intended to cost $10b when it was approved in 2005.  It started production early this year, only to be shut in after a leak.  It is now expected to produce 100,000 bbl/d after phase 1, instead of the original estimate of 180,000 bbl/d.  There are two more expansions which were originally set to increase production to over 1mm b/d, but that is in some question at the moment.

Then there are the LNG projects like Gorgon and Wheatstone.  These have also had notorious delays and cost overruns.

These are just a few, but the point is that the offshore projects dominated by the oil majors don't appear to have particularly better economics than the onshore tight oil plays.  Just as for the onshore projects, some of the cost growth in the offshore projects is due to very tight market conditions for both labor and equipment.  As industry capex declines, costs should also decline for the mega projects.