360° Coverage : Cost Inflation In Energy Projects 2: The Myth Of The End Of...

2 Updates

Cost Inflation In Energy Projects 2: The Myth Of The End Of Cheap Oil

Feb 5 2014, 1:53pm CST | by

There is no question that development costs for oil products, as well as LNG plants, gas-to-liquid projects, and others have experienced substantial inflation over the past decade. The source of...

Filed under: news


36 weeks ago

Cost Inflation In Energy Projects 2: The Myth Of The End Of Cheap Oil

Feb 5 2014, 1:53pm CST | by

There is no question that development costs for oil products, as well as LNG plants, gas-to-liquid projects, and others have experienced substantial inflation over the past decade. The source of this increase, however, remains a point of contention.

One school of thought argues that “the easy oil is gone” and that marginal cost of new oil projects is $100 a barrel, meaning prices are unlikely to fall below that level for any length of time. The opposite point of view suggests that these are primarily cyclical, and will be reversed in time.

Research I have done suggests that the latter is the primary cause of recent cost escalation. (More in the next post.) Although massive projects like deepwater oil fields appear to involve much more effort than a shallow, onshore well, they also contain much more oil, so that unit costs ($/barrel) are usually not too dissimilar. And while those who believe that the early days of the industry resemble the title sequence of the Beverly Hillbillies, with Jed striking oil by firing a bullet into the ground, the reality is contained in books like “Hell’s Half Acre” about the early days of the Canadian oil industry (not the cheesy B movie.  Okay, I haven’t seen it, but just look at the poster.)

The perception that the industry has, suddenly in the past decade, moved from “easy” oil to “hard” oil is fallacious. The huge number of oil fields (over 40,000 discovered to date) means that there is a continuum of potential development projects, not a dichotomy. Although geopolitical events such as the upstream nationalizations of the 1970s, can shift the industry from cheaper wells to more expensive wells, that was a one-time event, unlikely to be repeated.

And those who, like peak oil advocate Colin Campbell, believe that most new supplies must come from the Middle East are contradicting themselves, since countries like Iraq and Saudi Arabia typically produce about 10,000 barrels a day from conventional wells, versus a more typical 10-20 barrels a day in North America. Relying more heavily on the Middle East for oil supplies would mean lower costs overall.

It’s true that the industry is using larger and much more sophisticated equipment to access supplies, but this is not so much an indication that the ‘easier’ oil is gone as that the ‘harder’ oil has become easier, and often accessible. After all, no one thinks the use of four engine jetliners is a sign that the ‘easy’ sky is gone, or that skyscrapers mean that there is no land to build upon.

In the end, the reality is that most comments on oil development costs are based on vague impressions, not careful analysis. In the next post, I will argue that cyclical factors, especially high oil prices, are driving up costs.

Source: Forbes Business


7 weeks ago

Khazanah throws MAS RM6b lifeline

Aug 29 2014 5:01pm CDT | Source: Business Times Singapore

August 30, 2014 1:15 AMKHAZANAH Nasional will inject RM6 billion (SS$2.4 billion) over three years to resuscitate loss-making Malaysia Airlines (MAS) under a recovery plan that includes even an Act of Parliament. Other key moves are migrating its operations, assets and liabilities to a new company (New ...
Source: Business Times Singapore   Full article at: Business Times Singapore


7 weeks ago

MAS posts loss of RM307m for Q2

Aug 28 2014 5:00pm CDT | Source: Business Times Singapore

August 29, 2014 1:13 AMMALAYSIA Airlines (MAS) registered a loss of RM307 million (S$122 million) for the second quarter to end-June, but warned of worse to come in the second half when the "full financial impact of the double tragedies of MH370 a ...
Source: Business Times Singapore   Full article at: Business Times Singapore


Don't miss ...


<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.


blog comments powered by Disqus

Latest stories

New Zealand fault hole revealing secrets of earth's crust
Wellington, Oct 20 (IANS) An international team of scientists drilling a 1.3-km deep hole into the Alpine Fault in New Zealand's South Island say they are already gaining valuable insights into the earth's crust less than a quarter of the way down.
Young kids often given wrong medication
New York, Oct 20 (IANS) One child is affected every eight minutes when usually a well-meaning parent or caregiver commits an unintentional medication error, said a US-based study.
Parent stem cells controlled by progeny
New York, Oct 20 (IANS) Megakaryocytes or large cells found in bone marrow play a critical role in regulating stem cells, found a study.
'Time to rename medicines for mental health'
London, Oct 20 (IANS) In order to remove confusion for patients who could be prescribed drugs that appear to be unrelated to their condition, the world's major psychiatry organisations are proposing to completely change the terminology of the drugs used in mental disorders.

Latest from the Network

1,074 new dengue cases in Chinese province
Beijing, Oct 18 (IANS) China's Guangdong province has reported 1,047 new cases of dengue fever, health authorities said Saturday. Six people have already died in Guangdong -- five in Guangzhou and one in adjacent...
Read more on Business Balla
Blake Lively 'always' wanted to be mum
Blake Lively has ''always'' wanted to be a mother. The 27-year-old actress is expecting her first child with husband Ryan Reynolds and she admits she's been dreaming of this moment since she was a youngster. Speaking...
Read more on Celebrity Balla
Kris Jenner 'torn apart' by Bruce's new relationship
Kris Jenner feels ''torn apart and angry'' that Bruce Jenner is dating her former assistant. The 58-year-old matriarch split from the 64-year-old Olympic gold medalist last October following 22-years of marriage but is...
Read more on Celebrity Balla
Cheryl Fernandez-Versini won't move to France
Cheryl Fernandez-Versini doesn't want to move to her husband's home country of France. The 'X Factor' judge, 31, who comes from Newcastle, is adamant she won't be relocating any time soon to suit her new spouse Jean-...
Read more on Celebrity Balla
Lance Bass sets wedding date
Lance Bass has set a date for his wedding. The former *NSYNC singer and his partner Michael Turchin, who have been dating for two-and-a-half years, are to tie the knot on December 20, 2014, a representative for the...
Read more on Celebrity Balla
Nepal avalanche toll reaches 39
Kathmandu, Oct 18 (IANS) At least 39 climbers died while hiking on a key Nepali route after it was hit by a major snowstorm and avalanches earlier this week, BBC reported Saturday citing officials. Over 350 stranded...
Read more on Politics Balla
Jake Gyllenhaal says society is complicit in 'nightcrawling'
Jake Gyllenhaal says almost everybody in society ought to relate to his new movie 'Nightcrawlers'. The eagerly-awaited film concerns those people who monitor police scanners and then race to crime scenes to film eye-...
Read more on Movie Balla
India eves look for first win in AFC U-16 qualifiers
Dhaka, Oct 18 (IANS) India will hope to register their first win of the 2015 Asian Football Confederation (AFC) Under-16 Women's Championship qualifiers when they take on hosts Bangladesh in a crucial encounter at the...
Read more on Sport Balla
Moyes mulling return to management
London, Oct 18 (IANS) Former Manchester United manager David Moyes said that he is ready to revive his managerial career six months after being sacked by the 'Red Devils'. "I am ready to return. I have enjoyed the...
Read more on Sport Balla
Ebola fears loom over Ghana hosting AFCON
Accra (Ghana), Oct 18 (IANS) The Ghana Medical Association (GMA) cautioned the government Saturday against hosting the 2015 African Cup of Nations (AFCON), despite a request by the Confederation of African Football (...
Read more on Sport Balla