As thousands of gallons of oil continue to spew from Deepwater Horizon into the Gulf of Mexico, industry analysts turn their attention to regulatory tightening and a pullback in domestic drilling.

If regulations increase, the costs of exploring and drilling will most likely rise, Faisel Khan of Citigroup Investment Research & Analysis says. After surveying about 400 companies worldwide, Citi’s research team found that E&P costs already increased — exponentially — over the past five years.

“From 2000 to 2004, we saw finding and development, F&D, costs rise from $4 to $6 per barrel. By 2008 we saw those costs rise to $18 per barrel. This is massive cost inflation,” Khan said. “In order for companies to meet their cost of capital at $18 per barrel in F&D costs, we need an $80 oil price. So far these costs have been flattening out. A higher level of regulation could add to that.”

Although companies such as BP (BP) are self-insured, increased costs could swallow smaller, insured E&P companies.

“To some degree, it might give the super majors more of a competitive advantage when it comes to drilling offshore in these deeper horizons because the costs are so high and the risks are so high that essentially someone with a massive balance sheet becomes the only party that can drill and produce in such extreme conditions,” Khan said.

While the industry sorts out possible regulatory hurdles, the extension of the offshore drilling moratorium adds to the unknowns.

“The BP incident really puts a logjam in that whole [legislative] process,” Khan said. “There’s no doubt that any sort of comprehensive energy legislation that we see come out of Congress will not be as constructive as we thought. California and Florida have already pulled back from the table.”

This entry was posted on Wednesday, June 2nd, 2010 at 1:28 pm and is filed under General Investing. You can follow any responses to this entry through the RSS 2.0 feed.