Drilling Cost Escalation in the Gulf of Mexico

This paper presents the historical trend and de- fines the causes of drilling cost escalation in the Gulf of Mexico during the 1970's. The three major components of escalation are: 1) inflation, 2) supply-demand imbalance (demand pull) and 3) decreases in drilling efficiency. The decade was divided into three periods. During each period one component of escalation was responsible for most of the rise in costs. From 1970 through 1973 only inflation pushed costs upward. During 1974 and 1975 a supply- demand imbalance caused most of the escalation. Since 1975, decreases in drilling efficiency have produced the major component of escalation. During any one year or period of years, the sum of the three components will give the total escalation rate. The reasons why different components contribute more toward escalation during certain years than others are shown by following the timing of oil and gas price increases, the overall quality of the acreage offered each year in offshore lease sales and the resulting drilling activity.