The index points to underlying structural increases in development costs for the broader industry.
At $18 per barrel, the cost figure would seem rather low. But it is important to note that this is just for “development costs,” which represent just over half of a company’s total cost. That figure excludes the cost of exploration as well as funding ongoing operations. So the “breakeven price” so often quoted in the media is actually quite a bit higher. BP, for example, recently admitted that its finances will not breakeven unless oil trades at roughly $60 per barrel.
The supermajors are in a tricky position. They are trying to cut back on spending in order to fix their finances and pay down the massive pile of debt that they have accumulated in the past few years. However, their reserves will decline if they fail to replace them. Exxon, for example, only replaced 67 percent of the oil it produced in 2015.
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Moreover, as Apex Consulting notes, oilfield services might demand higher prices in the future as drilling activity picks up. Right now, offshore rigs are still underutilized, meaning that price inflation has yet to kick in.
In other words, the decline in costs post-2014 are, at least in part, cyclical. Costs will rise again as activity picks up unless oil producers work with their suppliers to address the underlying structural costs of oil production.
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