Several new studies have shed some light on trends in the upstream energy sector. For example, upstream M&A transactions have reached their highest point in nearly a decade as worldwide per barrel deal pricing has soared to new highs. Unfortunately, the cost of major oil and gas production projects has risen even faster.
John S. Herold Inc. and Harrison Lovegrove & Co. recently released their 2007 Global Upstream M&A Review in which the two firms provide a comprehensive analysis of more than 280 upstream transactions valued at $166 billion that were announced in 2006.
Key conclusions of the review are:
On the minus side of the balance sheet, the costs of major production projects have risen more than 53% in the past 2 years and no significant slowing is in sight, according to a recent study by IHS and Cambridge Energy Research Associates (CERA).
The IHS/CERA Upstream Capital Costs Index (UCCI), which tracks 9 key costs areas for offshore and land-based projects, climbed 13% during the 6 months ending Oct. 31, 2006. This compares with a 17% increase the previous 6 months. Since 2000, the UCCI has risen a whopping 67% -- with most of the increase in the last 2 years.
“If current trends continue, 2007 is shaping up to be a year of further increases,” commented Richard Ward, CERA senior director and UCCI project manager. “We expect project capital costs to continue reaching new levels in 2007. With high oil prices driving new development projects, capacity constraints continue to support increases in the cost of equipment and services.”
Deepwater projects have had the largest cost increases, according to the UCCI data, rising 15% during the 6-month period due mainly to high drill rig rates, technology limits, and skills requirements. Onshore projects have increased at a slower rate, but are only slightly behind overall averages.
If oil prices stay above $55/bbl, CERA expects confidence to remain, but should prices slip below $50/bbl, the industry should expect some expansion projects to be cancelled or delayed, said Ward.
Don Stowers
Editor-OGFJ