Why is it that when crude oil production goes down, cost recovery actually goes up? This question is often asked by stakeholders in the upstream oil and gas industry. They haven't even got a satisfactory answer to this question.
Then, what causes the cost recovery to increase? One of the facts is the increase in oil and gas prices. As an illustration, from 2001 to 2012, the price of crude oil rose from US $ 23.61 per barrel to US $ 112.33 per barrel. This increase has encouraged oil and gas companies to increase their exploration and exploitation activities.
Increasing operational activities increase the demand for goods and services in the upstream oil and gas industry. According to economic law, an increase in demand results in an increase in prices. From 2001 to 2012, total costs in the upstream oil and gas sector increased from US $ 3.78 billion to the US $ 16.54 billion and cost recovery increased from US $ 4.35 billion to US $ 15.54 billion.
From 2014 to the second quarter of 2016, the price of oil fell from the US $ 95.57 per barrel to US $ 35.8 per barrel. The decline in oil prices has an impact on reducing exploration and exploitation activities. During that period, total costs decreased from US $ 19.24 billion to US $ 10.95 billion and cost recovery decreased from the US $ 16.27 billion to US $ 11.65 billion.
Blogger Agus Purnomo in SKK Migas
"Even though until now the reduction in cost recovery has not been proportional to the decline in oil prices, the oil price factor has a significant effect on total costs and cost recovery," said Head of Public Relations of SKK Migas, Taslim Z. Yunus.
Cost recovery includes not only costs incurred in the current year, but also costs that have not been returned in previous years, such as investment for exploration, depreciation costs, and drilling development wells. Previously, these costs were borne by the contractor.
Once production starts, these costs begin to be calculated in cost recovery. This is one of the factors that also cause cost recovery to not always be directly proportional to production.
Another factor that causes cost recovery to increase when production decreases are high operating and maintenance costs. It should be noted, although there are more than 200 oil and gas working areas, national production is currently supported by only 15 oil and gas blocks. These fifteen working areas contribute more than 90 percent of national production.
Most of these blocks have been in operation for more than 30 years, some are even more than 50 years. These old fields require higher operating and maintenance costs to remain active. On the other hand, the production of these fields naturally continues to decline.
The high-cost recovery is also a consequence of the rules that oil and gas contractors must follow. For example, PSC Contractors cannot necessarily supply goods and services from abroad even though the price is cheaper because they have to prioritize domestic producers.
According to government regulations, upstream oil and gas contractors must prioritize the use of domestic goods and services, such as the use of ship pipes, floating storage and offloading (FSO), barges, and others.
Taslim said, along with the drop in world oil prices, SKK Migas has asked contractors to renegotiate all procurement contracts for goods and services for the upstream oil and gas industry. On the other hand, he said the high-cost recovery was because the use of domestic goods and services actually created multiple effects for other sectors.
"In this case, the upstream oil and gas industry drives the national economy.
Investor Daily, Page-3, Friday, Oct 21, 2016
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