Rising Exploration Costs and Falling Discovery Sizes Make Oil Exploration A Dodgy Bet  

Robin Bromby's "Pure Speculation" column in The Australian notes the increasing cost of oil exploration is more than compensating for the rising oil price, making investments in oil explorers not so much of a sure thing - Oil future: less bang for your buck.

AT $US100 or more a barrel -- actually, even at $US80 or $US90 -- your immediate instinct would be that companies finding and producing oil would be well on the way to making some good returns for shareholders. But no, says Austock Securities. In fact, its research shows that the oil sector is likely to underperform the market over the next few years. In general terms, writes analyst Simon Oaten, Australian company costs of finding new reserves are between 200 per cent and 300 per cent higher than they were five years ago.

Take his analysis of three-year average finding and acquisition costs per barrel of oil equivalent (that means all the oil and gas values thrown in together). For Australian Worldwide Exploration (AWE), the three-year average cost is $69.70 for each boe found, largely due to the big 2007 exploration program in New Zealand. For Roc Oil (ROC) the three-year average is $94.70/boe, the Angola work being the main driver of that cost.

These are the higher-end ones. Copper Energy (COE) costs came in at $32.40/boe and Oil Search (OSH) at $14.50. Petsec Energy (PSA) was in the middle at $31/boe found.

Those of you who accept that oil is going to get harder and harder to find will not be surprised by Austock's findings. Discovery size per well has fallen by about 65 per cent over the past five years and the average number of wells drilled by companies has increased by 25 per cent over that period.

We think that means fewer bangs for your buck per well. These trends have significant implications for profitability in the years ahead, the report states.