Oil costs include expenditure on exploration, extraction, refining and transportation. The oil industry is highly capital intensive. The investment to revenue ratio is about 8% for the entire sector and approximately 17% for oil producing companies.
The demand and supply cycle also introduces volatility into the oil trade. Demand grows on average by 2% each year, but will spike with economic growth and political threats, and drop when recession hits. The lifespan of any oil field is about 15-20 years and requires significant upfront capital investment. Hence, in order to meet the escalating demand, oil companies have to continuously search for new fields and take calculated risks in their development based on expected oil prices over the lifetime of the oil field.
Oil Costs: Types
The major types of oil costs can be categorized as:
Exploration costs: The costs associated with exploration vary significantly, depending upon the scope of a particular project and the region. The exploration stage includes the cost of conducting geological surveys and scientific studies (both preliminary and advanced). Even unsuccessful explorations involve the cost of seismic programs and drilling dry wells, which can vary between $5 million and $20 million. Drilling expenses are the most dominant factor, which could be as high as several millions of dollars.
Development costs: These include the cost of developing the extraction site, such as surface installations, subsea installations and other production units. This stage is also characterized by heavy labor costs. The magnitude of the project defines the structure and equipment for installations.
Treatment costs: Crude oil has to be refined for obtaining oil products. The setting up of refineries requires huge installations. Also, the refining process includes heavy machinery, which adds to the cost of oil in the international market.
Transportation costs: The oil industry is one of the biggest consumers of steel required for export pipelines and tankers. There are more than 10,000 oil tankers in the world, with some of them having a capacity of 350 million tons. For an offshore site, export pipelines have to be laid down, whereas an onshore oil field uses oil tankers. Transportation costs are less for countries that produce oil by themselves. There it includes only the cost of transporting oil from the shore to the refinery and further to the distribution centers. However, for countries that import oil, transportation also includes shipping of the refined oil.
Apart from these visible costs, there are several indirect costs, such as hiring equipment of production, consumables at oil sites and services.