Efforts that have included smaller project footprints, simplified processes and standardization, technology and lower service costs resulted in a more than 41% drop last year on an index that tracks the development costs of oil and gas supermajors.
But despite improved performance, costs were still higher than they were between 2011 and 2014 when costs for materials, equipment and labor rose as oil companies faced overruns and delays, according to a study recently released by Apex Consulting’s Muktadir Ur Rahman.
Cost efficiency gains made since 2014—when lower oil prices forced supermajors and smaller companies alike to work smarter—have ushered in an era of cost control and capital discipline; however, challenges remain when it comes to cost reduction sustainability. There are ways to mitigate the risk of rising costs, and some companies are already on the path.
“Among the seven companies analyzed between 2011 and 2017, we found that Eni’s performance improved the most, followed by Chevron and Total. Although the 3-year weighted average development cost per boe went down for these companies over this period, it increased for the other four companies in line with the wider industry trend,” Rahman said in the study. “Looking ahead, 2018 may turn out to be the year when development cost deflation bottoms out, leading to a rise in the index in subsequent years. Therefore, the industry needs a new business model, one that encourages greater collaboration and appropriate risk-sharing to prevent the recurrence of the runaway.”
Focusing on BP (NYSE: BP), Chevron Corp. (NYSE: CVX), ConocoPhillips (NYSE: COP), Eni (NYSE: E), Exxon Mobil Corp. (NYSE: XOM), Royal Dutch Shell (NYSE: RDS.A)and Total (NYSE: TOT), Apex Consulting reported its so-called “supermajor cost index” for the companies fell by more than 41% in 2017 compared to 2014, but was up 16% compared to 2011.
The index is based on a formula used to measure the efficiency of a company’s development costs, which typically outweigh exploration and operating costs. As explained by Apex, the index uses a weighted three-year average to track changes in development costs. That latest index reflects cost-saving steps implemented since the downturn. A rising index signals more cost pressure across the industry, while a falling index signals an easing of cost pressure, the study states.