Section One

30
Box 1.2
Costs and long-term price assumptions
One commonly used indicator of future costs separates the estimated range of costs
by resource type. This considers the costs of conventional oil supply in various
world regions, as well as the estimated costs of non-conventional oil, such as oil
shales, gas-to-liquids (GTLs) and coal-to-liquids (CTLs). The range of costs portrayed
suggests that long-term real price assumptions from the WOO 2010 could
be considered low. 2 However, such cost curves also show that, at high prices, vast
amounts of non-conventional oil would become economic. Thus, the use of such a
curve to inform the debate on relevant marginal costs also questions the use of ‘too
high’ price assumptions.
It should also be noted that the usefulness of the estimated supply cost curve is limited,
as it does not provide an insight into how future costs might evolve: the outcome
of the opposing forces of resource depletion and technol ogical development
is a constant source of debate, due to the fact that it is unobservable. However, for
non-conventional supplies – with resource depletion less of a constraint – it would
be expected that costs would gradually fall. And the cost curve demonstrates that,
at real prices around $110/b, practically the entire non-conventional resource base
is already economic in terms of long-term supply.
What is observable is the past behaviour of costs and it is important to try to
understand from these trends where costs might be heading. Figures in this Box
show the development of the IHS CERA Upstream Capital Cost Index. From
2000 to 2008, third quarter costs increased by 130%. After that quarter, as the
Great Recession took hold and both oil prices and oil demand were negatively
affected, costs began to fall. However, costs bottomed out towards the end of
2009.
This cost behaviour reflects both structural and cyclical drivers. The structural upward
pressures are known to stem largely from the move towards supplying oil from
increasingly hostile environments, the expanding distances between sources of supply
and markets, and geological challenges. On the other hand, cost increases were
also affected by cyclical pressures, such as capacity and labour shortages and steel
price behaviour, in particular in the context of surging global economic growth.
The retreat of costs reflects the easing of these cyclical effects. 3
IHS CERA’s most recent data shows that costs have begun to rise once more, as oil
supply activity picks up during the economic recovery. It has been suggested that
regulations put in force following the Deepwater Horizon drilling rig explosion in