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Big Oil's pain
While record prices have produced record profits, they have also helped make crude a lot more expensive to pump.
By Steve Hargreaves, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- It's always more expensive to go to the ends of the earth.

But as oil companies chase dwindling supplies by drilling in the icy waters of eastern Russia, map deposits under the rebel-infested Nigerian bush, or cut deals in corruption-prone central Asia, it's not just expedition costs that are making it more expensive to pull a barrel of oil out of the ground.

Thanks to record oil prices spurring an exploration boom and a cyclical industry woefully unprepared to meet its labor needs, the cost to produce a barrel of oil has skyrocketed in recent years.

Between 2001 and 2004, the average costs to operate a land-based oil well in the U.S. nearly tripled, according to figures from the Energy Information Administration and supplied by the Independent Petroleum Association of America, an industry trade group.

And Exxon Mobil (Charts) said industry wide development costs soared nearly 30 percent from the first quarter 2005 to the first quarter 2006.

While there is little sympathy among the public for companies that are posting record profits amid prices that have more than tripled since 2002, and little concern from investors as well, it's an often overlooked component to high oil prices that has many in the industry worried.

"This is certainly one of the top issues people are talking about," said Frederick Lawrence, vice president of economics and international affairs at the Independent Petroleum Association.

The lure of $80 oil

One reason for the cost runup is that, at nearly $80 a barrel, everyone wants to find more oil.

But the equipment needed is massively expensive and takes years to build. So, as is so familiar with other aspects of the oil story, limited supply is bumping up against surging demand.

Take the rental rate on a drilling ship, for example.

In the late 1990s and early 2000s it cost an oil company $200,000 a day to rent the latest generation drill ship from Transocean, an oil supply firm that operates the 835-foot long monstrosities, which use a complex Global Positioning System and series of thrusters to stay perfectly still while drilling in the deepest parts of the ocean.

In 2006, a Transocean spokesman said its latest generation ship was going for $525,000 a day.

"You're seeing unbelievable rates right now," said Lawrence. "It seems like we're getting into a new level."

Lawrence said the shortage has led to acute global competition in which global infrastructure is being shuffled according to who can pay the most.

"You're already seeing Chinese rigs in the Rockies," he said. "And the Middle East is trying to pull rigs from the Gulf of Mexico."

Who's gonna do it?

Another component to higher production costs is the shortage of labor.

From the early 1980s to 2005 the number of people working in the U.S. oil industry fell from about 900,000 to about 300,000, according to the American Petroleum Institute, another industry association.

Some of the decline was due to labor-saving efficiencies, but there were other factors at work.

"If your child was in college in 1999, when the price of oil was $12 a barrel and the industry was flat on its back, would you have encouraged them to go into geology," asked Steve Enger, an analyst at Petrie Parkman, a Denver-based energy investment boutique. "The boom and bust nature of this industry keeps people away."

The result is a doubling of the average industry wage from 1986 to 2004, according to numbers from the Department of Labor supplied by the Independent Petroleum Association.

From ads in the Wall Street Journal to print material aimed at high school students, Lawrence said the industry is using a variety of methods to attract new workers.

He said one promising demographic is people returning from the military, as they are used to working in harsh environments.

Some companies are getting creative, pushing things beyond salaries and benefits.

BP (Charts) is touting its reputation as one of the more environmentally friendly oil majors.

"New graduates find some of our green values attractive to them," said Scott Dean, a BP spokesman.

Related: Oil: Looking at $100

Plus: Big oil dominates Top of page

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