Oil Industry’s Labor and Drilling Costs Are Soaring

Major oil companies including Chevron, BP, and Royal Dutch/Shell Group are spending more than ever for workers and equipment as surging energy consumption increases demand for geologists, drilling rigs, and pipe.Finding and pumping a barrel of oil – including labor, equipment, and seismic testing – cost a record $17.12 last year, up 43% from a year earlier, data compiled by Bloomberg show. One example: A rig that can drill in mile-deep water averaged $183,217 a day in the first quarter, up from $127,990 the year before, according to Houston consultant ODS-Petrodata.The expense has helped push petroleum prices higher through 2011, the furthest out that contracts for future deliveries trade on the New York Mercantile Exchange. While prices have fallen 12% from their all-time high, ending at $51.01 a barrel yesterday, oil futures prices for the next five years are more than double the 1990s average of $19.69.“The costs of bringing new barrels on line are much higher than they once were,” said David Anderson, a portfolio manager at Palo Alto Investors. “You need oil probably to average $40 a barrel or better” to foster the investment needed to keep production rising in step with demand, the former Chevron accountant said in an interview last week.Oil companies continue to set profit records even as they pay more in salaries and equipment costs because soaring demand has doubled oil futures prices in three years. Futures set a fixed price for delivery of a commodity at a later date.Six of the world’s biggest oil companies last month reported a combined $25.5 billion in first-quarter earnings, up 35% from a year earlier. Irving, Texas-based Exxon Mobil, and London based BP, the world’s nos. 1 and 2 publicly traded oil producers, were among those with record results.“Costs have gone up but, frankly, they haven’t gone up as rapidly as the prices we’re receiving for what we produce,” the chief executive of St. Mary Land & Exploration Company, a Denver oil company, Mark Hellerstein, said. “The worry is that you’re investing in long-term assets based on today’s prices, and if those prices fall at some point down the road, your project is at risk of not paying off,” Mr. Hellerstein said.For Mr. Hellerstein, whose company pumps oil in Texas, Louisiana, Arkansas, and the Rocky Mountains, the cost of lining new wells with piping has jumped 20% as steel prices rose. Drill bits also cost more, rig leases are at a record high, and labor costs have soared, he said.St. Mary reported May 3 that first quarter results were a record. Net income rose almost 64% to $35.1 million from $21.4 million the year before, the company said.“The oil and gas industry is booming, and that’s made it harder to find qualified people because they can command bigger bucks now,” said Dan Sarnecki, who oversees 115 geologists and engineers at the Alberta Energy & Utilities Board in Calgary. “We’re having to offer people more money because demand for their services is so much bigger than what it was.”Neil Camarta, a senior vice president with Shell’s Canadian unit, said in a May 18 Webcast from Calgary that thousands of workers might have to be recruited outside the country because of labor shortages as the nation’s oil sands production is expanded. There are about 15,000 Canadian pipe fitters and other tradesmen available to fill 25,000 jobs over the next five years as Shell, Suncor Energy, and other producers expand, Mr. Camarta said. Shell Canada and its partners expect to spend at least C$4 billion to boost output to 300,000 barrels per day by 2010. Suncor, Nexen, and Canadian Natural Resources are also expanding projects or building new ones.“That leaves one huge gap,” Mr. Camarta said. Shell would import workers as a last resort, he said. “People think that bringing in foreign labor is going to be cheap. It isn’t going to be cheap, it isn’t going to be easy, but it’s most likely going to have to happen.” Oil-industry chief executives have been plowing profits from record prices into share buybacks, debt repayment, dividend increases, and acquisitions. They also have passed some gains on as bigger salaries and signing bonuses for the people needed to exploit new oilfields, said Arthur Smith, chief executive at John S. Herold Incorporated in Norwalk, Conn.Entry-level geologists at American oil companies are earning an average salary of $65,600, a 24% increase from 1999, Mr. Smith said in an April 19 report, citing the American Association of Petroleum Engineers.“Ten years ago, a geologist couldn’t find a job,” said Mr. Sarnecki, who worked for Imperial Oil, Canada’s biggest oil company, before joining the Alberta authority 30 years ago. “Now, you can’t find a geologist.”The rates drillers charge oil companies to lease rigs jumped to record highs during the first quarter, according to ODS- Petrodata. Use of the worldwide fleet of 664 rigs is rising: 88.4% are being used today, up from 81.7% a year ago and 80.9% five years ago, ODS-Petrodata figures show. During the first quarter, Transocean, the world’s largest offshore driller, GlobalSantaFe, and other drillers commanded average rates that were 43% higher than a year earlier, according to ODS-Petrodata.

Oil Industry’s Labor and Drilling Costs Are Soaring

Oil Industry’s Labor and Drilling Costs Are Soaring

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