Uchenna Izundu
International Editor
LONDON, Feb. 20 -- High oil prices have not resulted in high returns on projects because of an increase in exploration costs and the taxes earned by host governments, according to energy consultancy Wood Mackenzie Ltd., Edinburgh.
Operators now need to assume an oil price of $70/bbl to earn close to 15% on exploration, WoodMac Exploration Service Manager Alan Murray told delegates at International Petroleum Week in London. "Cost increases mean that pretax margins on new fields have not increased with oil prices."
Many host governments such as the UK, Algeria, and Bolivia changed their fiscal regime as oil prices soared, leaving fiscal certainty a major issue for companies. This is having the greatest impact on exploration economics, Murray said. Other governments such as India, Malaysia, and Angola have tried to capture the upside in their progressive production-sharing contracts that allow them to benefit if oil prices increased.
Companies are using different methods to build on their assets—either through exploration programs, mergers and acquisitions, or participating in developing major resource opportunities such as Russia's Shtokman gas field in the Barents Sea.
But dry holes are a major risk with exploration, and high development costs are key problems in a volatile market. Developing major resources requires substantial investment. Pursuing mergers and acquisitions is also costly, with the risk of overpaying for assets in a high-priced environment.
"Exploration is the better option as a resource capture strategy because this has better returns and allows more flexibility compared with other strategies," Murray said.
Contact Uchenna Izundu at [email protected].
