Irish newspaper article on TLW

18 February 2007
The Sunday Independent (Ireland)
Tullow Oil squeezed by soaring costs

INVESTORS who bought into oil companies four or five years ago have enjoyed a great run as global fuel prices soared - and Tullow Oil has done better than most, with its share price more than quadrupling from €1.48 to €5.94 over the past five years. Unfortunately for their pockets, investors have paid less attention to the escalating costs of prospecting for, and then extracting that same oil and gas. Last week, the energy consultants at Cambridge Energy Research Associates published their upstream capital costs index. This showed that a basket of exploration and production costs had risen by 53 per cent over the past two years. The bad news for investors is that price inflation in this sector shows no sign of easing. Tullow Oil produced the equivalent of 58,000 barrels of oil per day in 2005. The cash cost of extracting this oil was the equivalent of stg£4.84 per barrel (Tullow presents its accounts in sterling), which amounts to just over stg£102m for the full year. This year, Tullow is producing the equivalent of over 80,000 barrels a day. Given the sort of inflation being experienced in the oil and gas sector, the company probably won't get any change out of stg£7 a barrel to extract the stuff. That's at least stg£205m for 2007. Back when oil prices were at over $70 and gas prices at over stg70p per therm (ie: per unit of heat), these escalating exploration and production costs were no more than a minor nuisance. Not any more. With their recent mini-rally now run out of steam, oil prices are falling again - and were down to $56 by the end of last week. Meanwhile, gas prices - at just over stg20p per therm - are at their lowest for over three years. Tullow is being squeezed between lower prices and higher costs. This means that the only direction the shares are headed is down.