Finding and development (F&D) cost increases have been affecting the performance of Canadian E&P companies, particularly those operating in high-cost areas such as the Gulf of Mexico, Europe as well as at home in Canada. However, greater geographic diversification has allowed some to keep consolidated costs at competitive levels. That's the take of Standard & Poor's Ratings Service in a recent report on Canadian producers. "Based on a sample size of nine rated Canadian companies, increases in operating costs across companies have been between 3.3% and 10.8%...since 2003, thereby affecting unit netbacks and operating cash flows," the rating agency reports. Operational issues during the first half of this year further affected costs of pure-play oil-sands companies given the high fixed-cost component in their operating costs. For example, Suncor Energy Inc.'s compound annual growth rate (CAGR) was affected by a production outage caused by a January 2005 fire at one of its oil-sands upgraders. "In addition to the impact of industry-wide factors on unit costs, planned and unplanned maintenance shutdowns in the first half of the year partially contributed to cost increases of both conventional and unconventional upstream producers," S&P reports. Meanwhile, traditional producer Nexen Inc. is benefiting from lower-cost international operations, and Talisman Energy Inc. has been able to offset some cost increases in high-cost regions with lower costs elsewhere. Smaller and midsize companies, such as Baytex Energy Trust, that have a regional focus have been more susceptible to rising costs. "Given the global trend of rising costs and the need to generate reasonable returns on capital employed, the floor price at which exploration and development activity is economical has risen above the previously accepted mid-cycle price levels." S&P predicts that commodity prices will continue to be higher than cost escalation in the near-term, and most companies will generate positive free cash flow. However, the way the excess cash is deployed will have a "meaningful effect" on ratings.