The oil industry's worldwide finding, development and acquisition costs have risen markedly during the past two years, reports Calgary-based FirstEnergy Capital. 2004 corporate average FD&A costs stood at US$10.95 net per barrel of oil equivalent (BOE). 2005 costs were US$14.58 net per BOE, a stunning 33% jump, the firm reports. The results are based on a study of worldwide FD&A costs calculated from reserve additions and capital expenditures from more than 100 companies around the globe. Regional FD&A costs, excluding revisions in Canada's bitumen reserves, show some intriguing trends. FirstEnergy used three-year averages for regional costs; in 2004, the trailing three-year average was US$7.34 per BOE and in 2005, it was up to US$11.19. Costs in the Asia/Pacific region and Europe are the lowest in the world, and costs in the Middle East and Africa are surprisingly high. However, national oil companies develop most Middle Eastern barrels, and data for their activities are not available. From a company perspective, Russian national majors such as Novatek, Rosneft and Lukoil score the lowest FD&A costs, with the caveat that the Russian tax regime is onerous. Among the worldwide majors, ExxonMobil and ConocoPhillips enjoyed the most favorable FD&A costs, and ENI and Total SA suffered the highest costs. Corporations are continuing their recent trend of spending more capital in foreign countries than in their home countries. In 2001, Chevron and predecessors spent approximately the same amount in the U.S. as in the rest of the world. In 2005, Chevron spent only 33% of its total budget in the U.S. Likewise, ExxonMobil invested equal amounts in the U.S. and in all of the Middle East, Asia, Pacific, Russia, the Caspian and Africa combined in 2001, but in 2005 the supermajor spent three times as much in the foreign arena as it did in the U.S. How sustainable are today's prices? First Energy divided cash flows per BOE by FD&A costs to measure the recycle ratio. "These numbers show that the sustainability has been on a long-term declining trend over the past seven years," said the firm. Certainly, a fundamental increase in the price of supply underlies the long-term rise in world oil prices. And, higher commodity prices have not improved economics, because FD&A costs, royalties and taxes have all risen simultaneously. Earnings have escalated as oil and gas assets that were developed in the past are produced at today's very favorable prices, but the industry is struggling with go-forward economics. "The incentive to find and develop more oil and gas is not as strong as it was five years ago." FirstEnergy concludes that inflated global supply costs and flat economics, counterweighted by continued strong demand, will result in oil prices of US$55 a barrel through to the end of the decade.

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