Prospecting for oil is one of the world’s riskiest businesses. While the successes of the oil industry quickly becomes popular news, unsuccessful ventures often fade into obscurity. In 1983, 12 companies, drilling for oil in the Beaufort Sea, spent $2 billion prospecting for oil and in the end all they had to show for it was a dry hole.
An exploratory rig costs between $8000 to $15000 a day to operate. So why is crude oil drilling so expensive? Here is a break-up of the costs that go into an oil drilling operation:
- Payments to welders, contractors, mud loggers, supervisors, scientists, geologists and other skilled workers.
- Payments to personnel for cementing, logging, drilling, casing and logistics.
- Making payments to landowners (if offshore, territorial payments to countries), tax payments, attorney fees, fees for permits to drill wells.
- Maintenance costs- An oil rig runs for 24 hours a day, in three shifts. The company also has to arrange facilities for the crew like restaurants, food, water, motels.
The services of drilling contractors are also expensive because:
- It is very rare that a new oil well is discovered.
- The old/mature wells are giving low yields.
- The exploration process is very risky (financially).
- The price of oil and gas is always fluctuating.
- The demand for oil and oil drilling contractors is increasing.