Why finding costs are now a major problem [in the US petroleum industry]

A major problem facing the US petroleum industry is the higher average finding costs that now exist within the US compared to the average finding costs outside the US. It has been argued that federal lands and offshore areas need to be open for drilling in order to reduce average finding costs in the US. Certainly, the development of a national energy policy must acknowledge the importance of finding costs. Financial analysts for some time have acknowledged the importance of finding costs in evaluating individual energy firms. Analysts expect mergers when it is cheaper for companies to purchase reserves than to find them. Just as industry-average finding costs are a key determinant of long-term market prices for oil and gas, relative finding costs are a key determinant of a company's stock market value. Division managers are now judged regularly by top management on the basis of relative finding costs. The heavy use of finding costs data is causing its own problems, however, because there is as yet no standard for calculating and reporting those costs. This article analyzes the strengths and weaknesses of conventional techniques for determining finding costs. Our goal is a finding costs measure that is a reliable indicator of future profitability. Conceptually, a finding cost figure is a measurement of how much it costs a company to find a barrel of oil or an mcf of gas. The figure is arrived at by dividing the figure for costs incurred during a specified period by the volume (barrels or mcfs) of reserve added during the same period. (author)