A drop in 2015 full-cycle costs for North American exploration and production (E&P) companies reflects a combination of lower production costs and finding, development and acquisition costs (FD&A), according to Fitch Ratings. The prices – equivalent to a proxy clearing price that each producer would need to cover to remain in the business in the long run and meet its cost of capital – declined materially across a sample of 31 E&P producers for the year.
The adjusted full cycle oil price that the median producer in the sample would have needed to meet this proxy clearing price declined to $57.8/barrel in 2015, versus $75.8/barrel a year earlier.
The biggest drivers of the full-cycle cost drop across the sample were lower FD&A and production costs. Total full-cycle costs dropped by $8.41/boe for the median producer, and were composed of lower FD&A (down $3.26/boe), lower production costs (down $3.52/boe), lower interest (down $1.14/boe) and lower capital charges (down $0.49/boe).
Across the entire sample, the average full-cycle cost decline was $10.55/boe, composed of lower FD&A (down $6.49/boe), lower production costs (down $3.13/boe), higher interest (up $0.04/boe) and lower capital charges (down $0.97/boe).
North America has seen a relatively rapid re-set of drilling and service costs, particularly in the onshore (shale) space. Onshore shale has seen large capex cuts relative to other regions, as well as shorter contract terms and more aggressive efforts to extract concessions from all parts of the value chain. This is in contrast the offshore space, which is characterized by longer lead time projects and more substantial long-term contract protections, both of which tend to blunt the immediate impact of lower drilling and service costs.
Additional information is available at ‘www.fitchratings.com‘.
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