Rising Costs Imperil Energy Projects, CEOs Say

Spiraling industry costs are threatening to derail the viability of new energy projects needed to meet growing global demand.

“We’re seeing a cost squeeze,” Chevron Corp. (CVX) Chairman and Chief Executive Officer John Watson said today at the IHS CERAWeek energy conference in Houston. “The new reality in our industry is that costs have caught up to revenue for many classes of projects.”

Oil companies from BP Plc to Royal Dutch Shell Plc have cut spending and embraced asset sales to shore up finances as costs outpace energy prices. Costs must begin to come down in order for companies to be able to deliver the extra supplies to meet global demand, which will require the equivalent of 200 billion barrels of oil output by 2030, Watson said.

The complexity of developing energy resources in the U.S. has created a situation where profits at major oil companies have failed to keep pace with the price of crude. While the price of global oil has more than doubled to $105 a barrel since 2009, the biggest oil and gas companies have gained just 13 percent, according to data compiled by Bloomberg. The Dow Jones Industrial average has surged 81 percent in that time.

Global spending on exploration and production by the biggest publicly traded oil and gas companies in the world almost doubled from 2006 to about $120 billion last year, according to a December estimate from Barclays Plc. Spending is expected to remain relatively flat this year, according to the report.

Too Expensive

Offshore development costs are starting to approach the price at which oil can be sold for, Andrew Mackenzie, CEO of Melbourne-based BHP Billiton Ltd. (BHP), said today in an interview.

“Some of the rising costs have come about because of things being bid up, possibly being less productive,” said Mackenzie, whose company’s holdings include U.S. Gulf of Mexico wells in addition to iron-ore mining around the world. “You probably need another round of innovation.”

Cost is the most important issue facing energy producers, Christophe de Margerie, CEO of Total SA, Europe’s second-biggest oil and gas company, said today at the conference.

“We are responsible for what we deliver,” he said. “What we are delivering today is too expensive.”

Both De Margerie and Chevron’s Watson said the industry should negotiate with all of the companies involved in developing resources, from those they pay directly to those who service their suppliers.

International oil companies are seeing little to no output growth despite boosting spending 400 percent in the past decade, said Lars Christian Bacher, Statoil ASA’s executive vice president of international development and production.

“A lot of companies are spending more and more just to stand still,” Bacher said in an interview at the conference yesterday.

To contact the reporter on this story: Bradley Olson in Houston at bradleyolson@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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