Cost concerns dominate executive talk at energy conference

HOUSTON — The dominant narrative coming out of the CERAWeek conference has been the story of costs.

Energy sector executives have portrayed their industry as one that’s on an unsustainable course, due to rising upstream costs in recent years.

Chevron CEO John Watson said — in perhaps the most notable quote of the week — said “$100 a barrel is becoming the new $20 in our business.” Total CEO Christophe de Margerie upped the ante, saying “we cannot continue to swallow this huge inflation.”

Lars Christian Bacher, executive vice president for development and production at Statoil, probably put it most bluntly, arguing “the capital intensity of this industry is heading in a direction that’s not sustainable.”

But is it just talk, or something more?

Researchers at IHS, the firm sponsoring CERAWeek, said those types of comments aren’t exactly unheard of.

“Going to an industry conference and hearing costs are an issue is nothing new,” said Jim Burkhard the company’s vice president and head of global oil market research and energy, during a Friday morning wrap-up of the week. “We hear it every year.”

But, Burkhard noted, the intensity of the discussion did, indeed, seem a bit higher this year than in the past.

Big challenges: More megaprojects mean growing delays

Jerry Kepes, IHS managing director,  suggested there was a bit of strategy to the rhetoric surrounding production costs.

“We all know that the old game is: when it comes time to cost-cutting, the operators turn to the service companies and start beating the crap out of them,” Kepes said.

Kepes said it’s something of a game between the operators and the service companies they hire: operators complain costs are out of control because service companies aren’t disciplined; meanwhile, service companies call for more trust, cooperation and collaboration in an effort to blunt that criticism.

Kepes said in some cases, he expects operators to actually delay final investment decisions on some major projects in the coming years as a negotiating strategy to get servicers to make counter-offers at lower costs.

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