HPHT Drilling Costs Bring Profits into Perspective
In a world where the vast majority of people love to hate big business, oil companies frequently find themselves the targets of both government and citizen wrath because of the large profits they make. For example, one prominent American petroleum company announced profits of approximately $11.7 billion for the first quarter of 2008. This number outraged American media pundits and politicians alike, and sounded the alarm for investigations into why this company was allegedly making so much money off the backs of the American people. Thankfully, the CEO didn't back down. He had the courage to defend his company with the truth.
While freely admitting to the numbers, this CEO brought into play the one thing media and government never talks about: operating expenses. Every company spends money in order to make money; that's the first law of business. We should expect no different from big oil, which is seeing its costs skyrocket because of HPHT drilling.
HPHT stands for “high pressure/high temperature.” This sort of drilling, without getting into the technical aspects, is being used more and more in deep sea environments. It's also used in land-based environments where wells must be drilled deeper and deeper. HPHT wells are enormously more expensive than conventional wells both to drill and to operate. When one considers the operating expenses an oil company incurs, it brings great perspective to an $11.7 billion profit.
Using numbers provided by the CEO, the oil company in question spent close to $90 billion over the course of that quarter to operate. An $11.7 billion profit amounts to a 13% return. In the business world 13% is absurd; in fact, in many sectors it's not even worth doing business for that small amount.
Remember, profits must be distributed among all the shareholders. The lower the company profits, the lower the individual shareholder profit. In light of this, 13% for an oil company does not seem unreasonable compared to the amount of money spent.
Part of the problem with public perception is the sheer size of the $11.7 billion figure. But if we break it down into smaller numbers people can get their brains around, they might see things differently. So, if the average person invested $90 to earn sales of $101.70, it probably wouldn't be worth his time and effort. Yet that's exactly the ratio we're talking about with the oil companies; a profit of $11.70 per $90 spent.
The cost of operating, especially with increased HPHT drilling, means oil companies are investing more and more money for a smaller and smaller return. Hopefully, they won't reach a point where they decide it's no longer worth it. If they do, we may all be in trouble.