Pre-FID oil projects: global breakeven analysis {50% @ $60/bbl}

21 Jan 2016

[thackney]

Half of oil production from future developments is uneconomic at US$60/bbl Brent - this is the conclusion from our comprehensive breakeven analysis of future global oil developments. These comprise of conventional projects which have yet to receive final investment decision (pre-FID) and future drilling in US onshore Lower 48 plays; which are critical for future oil supply.

Using individual asset data and our suite of proprietary tools, including our Oil Supply Tool and Upstream Data Tool, we have produced a granular picture of the cost of new supply. By 2025, production from pre-FID projects and US Lower 48 future drilling could be nearly 15 million b/d. Only 7.6 million b/d comes from projects which achieve commerciality at US$60/bbl, a likely screening criteria.

Production from most future developments is required to fill the supply gap between declining commercial fields and projected growth in demand.

Under our Macro Oils supply-demand outlook over 22 million b/d is needed from new developments by 2025 to meet demand. We expect the pre-FID pipeline to contribute around half of this. However, the number of deferred pre-FID projects is growing as the oil price remains low. Without significant structural cost deflation, the majority of these projects, are at risk of further delay or a major overhaul of development plans.

Prices need to support the development of the next tranche of supply. This breakeven analysis provides support for an oil price floor in the longer term of above US$70/bbl.

Deepwater at greatest risk

Deepwater and ultra-deepwater projects sit high on the cost curve and are at greatest risk of delay.

Production from Angola, Nigeria, US Gulf of Mexico and Brazil is at risk due to weak project economics. Over 80%, or around 16 billion barrels, of deepwater and ultra-deepwater reserves are uneconomic at $60/bbl. The economics are relatively robust within onshore, tight oil and shallow water projects. In fact US Lower 48 is now the key low cost area and by 2025 contributes 70% of volumes produced under $60/bbl.

[thackney]

[Nervous Tick]

I’m curious. Did the oil industry expect this downturn?

If not, what unexpected event triggered the unexpected downturn? Or conversely, what blinded the industry to this possibility?

(By the way this happens in other industries. One that I am familiar with is semiconductors. DRAM for decades has been a wild and crazy way to make and lose lots of money in recurring famine-glut cycles.)

[thackney]

Did the oil industry expect this downturn?

I have not found any reliable reports prior that indicated it was coming. I see little actions in the oil companies behavior that indicated they did, just the opposite for many.

If not, what unexpected event triggered the unexpected downturn?

Supply grew faster than demand.

Or conversely, what blinded the industry to this possibility?

The possibility of oil price crash always exists in the industry, always has. No one of real experience would claim differently, except to pump up stock prices and investment...

[urbanpovertylawcenter]

I remember $140 oil and if the oil billionaires were very very careful they may still have some cash reserves left over.

[stockpirate]

While QE was on going the free money to the banks went in to commodities, once the free money stopped the fake support of the markets collapsed. The Fed was propping up the markets so Obama looked good and they could make trillions.

Now that the phony support for the markets is gone the markets will find out where REAL support lies. This applies to commodities as well as stocks, food etc.

The cost of production can be lowered by removing government fees, taxes and lowering wages across the board.

[thackney]

The catch is those in the oil business where spending those dollars drilling for future production.

That is why the profit margins don’t skyrocket with high prices, the “extra” money is spent buying pipe, valves, pumps, motors, controllers, cables, actuators, structural steel, etc. They higher drillers, hydro fract crews, buy more leases, etc.

When the price drops like this, they cut spending, layoff any they can afford to do without and hope to survive while the wells slowly decline in production rate.

The suppliers and contractors have the biggest decline in real business.

[zzwhale]

blah blah blah
do tell me the price of oil the day iran lobs the nuke at israel....
YEP
the same day n korea marches in to south
the same day china invades taiwan
yep
tell me