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Total SA (ADR) (TOT), Exxon Mobil Corporation (XOM): Just How Expensive Is Shale Oil?

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While new technologies such as fracking and horizontal drilling are largely responsible for the boom in U.S. oil and gas production, the costs associated with these so-called “technological barrels” are on the rise.

So exactly how costly is shale oil production? Staggeringly expensive, according to a new report from a leading energy research firm. Let’s take a closer look.

Costs still rising
According to recent estimates by Sanford C. Bernstein, a research and consulting firm, non-OPEC marginal cost of production rose last year to a whopping $104.50 a barrel, representing more than a 13% increase from $92.30 a barrel in the previous year.

What’s more is that marginal production costs for U.S. drillers rose by even more, in both relative and absolute terms, from around $89 per barrel in 2011 to a remarkable $114 a barrel last year. While many have argued that rising marginal costs of production for unconventional oil projects will help buoy oil prices by driving a floor underneath prices, they’re also limiting the industry’s profitability.


Bernstein’s findings are worrying, because they imply that new technological improvements aren’t enough to bring down the industry’s overall marginal costs. “What we call technological barrels are day after day more expensive,” Christophe de Margerie, chief executive of French oil giant Total SA (ADR) (NYSE:TOT), recently told the Financial Times.

Implications for big oil
That’s bad news for the world’s largest integrated oil companies, which are seeing reduced profitability due to the double whammy of rising costs and a cap on oil prices as a result of increased supply due to the shale boom. Not surprisingly, profit margins among the world’s 50-largest listed oil companies are currently the lowest they’ve been in a decade, according to Bernstein.

For instance, net income margins for Exxon Mobil Corporation (NYSE:XOM)BP plc (ADR) (NYSE:BP), and Total SA (ADR) (NYSE:TOT) have all fallen from their highs near the middle of the previous decade. Last year, BP plc (ADR) (NYSE:BP) and Total SA (ADR) (NYSE:TOT) reported margins of 3.1% and 5.9%, respectively, down significantly from 2005 respective margins of 9.2% and 10.5%.

Exxon Mobil Corporation (NYSE:XOM)’s net income margin, however, fell only modestly, coming in at 10.9% last year, as compared with 10.5% in 2005. And ConocoPhillips (NYSE:COP) was one of the few majors that managed to buck the weak margin trend, posting an impressive 14% net income margin last year, up from 8.2% in 2005.

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