the supposed oil n gas slowdown, page-17

http://www.rigzone.com/news/article.asp?a_id=70525

Exploration Costs Rise in Still-Busy Oil Industry
by Braden Reddall AFX News Limited Wednesday, December 10, 2008


Oil and gas companies hammered by plunging energy prices have seen no relief from exploration and production costs, which rose 5 percent in just six months this year, according to a leading consultancy.

Delays and cancellations of extraction projects have made little difference to the tightness in the market for materials and manpower after years of breakneck growth in the industry, according to Cambridge Energy Research Associates (CERA), a unit of IHS Inc.



Candida Scott, a director of cost analysis at CERA, said larger oil companies planning for five years out were reluctant to cut much spending until it was clearer where both costs and energy prices will settle.

"We've kind of got a motto of 'wait and see' -- it's a phrase we repeat a lot," Scott told Reuters in a telephone interview. "Everybody's taking a deep breath and holding it."

The IHS CERA Upstream Operating Costs Index, measuring cost changes in oil and gas field operations worldwide, rose to 203 in the third quarter from 193 in the first quarter, and has basically doubled since 2004.

Scott said when crude oil was last at $40 a barrel back in 2004, it felt like a "gift," but cost inflation meant earnings on the oil sold now did not go nearly as far as they once did.

Offshore costs continue to rise sharply, up 7 percent in the six-month period, as discoveries in new waters drive demand for rigs. In particular, marine inspection and maintenance costs grew by 8 percent, and the aftermath of hurricanes in the Gulf of Mexico this year only added to that pressure.

Jeff Kelly, associate director for the CERA Operating Cost Analysis Forum, said the effect of the credit crunch on the global construction market would not have much short-term impact on oil and gas operations.

"Fields already in production are unlikely to be shut-in in most regions," he said in a statement. "In time, if low prices persist, they are more likely to move to production optimization, increasing the need for in-field services."

Scott said weaker oil prices would ultimately lead to less exploration, which is more discretionary than spending on wells that have already been drilled and are producing oil or natural gas. Some U.S. gas plays would also shut down given how uneconomical they have become with the price drop.

But she did not expect to see many rig contracts broken, as happened when oil prices collapsed in the 1980s, because so many had since been written with penalties to prevent it.