represents a more conservative investment, since the economic and technical 

 feasibility of developing known reserves can be fairly accurately 

 determined, and only those projects yielding an acceptable rate of 

 return will be initiated. 



The decision to proceed or not to proceed with offshore exploration 

 and development of OCS oil and gas is an investment decision based on a 

 company's estimate of the costs involved in relation to the revenue 

 generated and the ultimate return on investment. Operations offshore 

 are considerably more expensive than onshore and the investment risk and 

 the return must be higher than what usually has been considered adequate 

 for onshore operations. 



The massive capital cost associated with establishing an offshore 

 production field weighs heavily upon the decision to proceed with OCS 

 development. As operations have moved into deeper waters, more hostile 

 environments, and more remote areas, the capital cost of the facilities 

 required to bring a field into production have climbed into the hundreds 

 of millions of dollars. Development of Phillips Petroleum's Ekofisk 

 field in the North Sea has cost approximately $4.5 billion. As a result 

 of such high costs, British operators now estimate that fields in the 

 North Sea must yield at least 200,000 barrels of oil per day to be 

 economically feasible. Support of the heavy "front-end" capital 

 investments required in frontier areas, especially the remote areas of 

 Alaska, will require production in excess of 100,000 barrels per day. 



Other important financial factors considered by the industry are 

 the cost of money, i.e., the prevailing interest rate to corporate 

 borrowers, and the considerable time involved between investment and 

 production. Time lags are in actuality money costs, because the investor 

 foregoes the opportunity of gaining a return while his money is tied up 

 in non-productive investment. When the time lag between beginning the 

 development of an offshore field and initiating production is long, as 

 it will be in the more remote areas of Alaska, only fields with 

 substantial reserves will attract investors. 



The overall investment of capital for developing offshore resources 

 both here and abroad is anticipated to continue at a rather vigorous 

 pace in the next few years. One estimate, predicts that in the years 

 1975-1980, expenditures for exploration in North America will amount to 

 $15 billion (85 percent of which will be in the United States), while 

 development costs to produce the discovered oil and gas fields will 

 amount to over $21 billion [14]. 



A most troublesome economic factor for the U.S. oil and gas industry 

 in the last several years has been inflation. The industry has had 

 problems getting a reliable prediction of what a project will cost when 

 finally completed. Costs on many projects have escalated drastically 

 from inception to final completion in the 1970' s. 



52 



