$70US Price Floor?

Note this study is based on old royalty regimes; and likely relatively light on current capital costs. They are escalating so rapidly using data only six months old would make for a considerably more optimistic case than reality.

The results are shocking, but I think true. Amazing that an industry that was doing OK only a few years ago at $30/bbl needs over twice that much now.

Oil, gas explorers feeling pressure of new price floor

Claudia Cattaneo, Financial Post Published: Wednesday, November 28, 2007

CALGARY - Oil and gas explorers around the world need US$70 a barrel oil on a sustained basis to make the returns they were making only a couple of years ago with oil prices at US$30, according to a study by international energy research firm Wood Mackenzie.

Rising costs for equipment, lack of access to many basins and more challenging plays have elevated prices needed to earn a return of 15% on exploration, Andrew Latham, vice-president of exploration service, said from Edinburgh, where the firm is based.

"Things have changed quite quickly," he said. "What we are seeing is the equivalent of a new price floor for explorers, and the US$30 that worked two or three years ago certainly doesn't work anymore."

The higher floor price is contributing to the higher price of oil, he said.

The study, based on an analysis of conventional exploration in 400 basins around the world, found the cost of drilling alone has risen by 60% since 2004. Mr. Latham said the basins hit hardest are those in deep waters, such as the Gulf of Mexico, offshore West Africa and Brazil, where there is a shortage of all types of equipment, from drilling rigs to floating production facilities.

With governments around the world nationalizing their oil industry, exploration companies have access to a relatively minor fraction of the undiscovered oil and gas potential, he said.

That means they're being pushed into more challenging plays in areas that are accessible but that take more technology, more money and more time to develop, he said.

Still, Mr. Latham said he doesn't see oil and gas companies backing off on exploration because they lack alternatives.

Oil and gas companies "are going to have to get used to achieving relatively modest returns, even though the oil and gas prices are very high, … because the alternatives are pretty challenging as well," Mr. Latham said. "If you are looking to develop discovered resource, which involves negotiating with the host governments, the terms of those deals are much tougher than they used to be."

The study included exploration activity in the Canadian Arctic and in Newfoundland's offshore, but not in Western Canada, where the oil-and-gas industry tends to be focused on resource plays that have a high chance of finding hydrocarbons, rather than exploration where the chances of success are small.

The study doesn't factor in changing fiscal terms under way around the globe that have yet to impact on explorers' revenues and will continue to push up the floor price needed by the sector.

"The majority of recent exploration is based around licenses which were negotiated in the 1960s, with fiscal terms more favourable than could be negotiated today," Mr. Latham said.

ccattaneo@nationalpost.com