Oil Producers Respond to Low Prices: WoodMac

The upstream sector has started to adapt to lower oil prices by cutting costs, and getting more projects over the economic threshold. Future commercial supplies are now increasing again, according to new research by Wood Mackenzie.

Its analysis shows 70% of new drilling in US tight oil plays and pre final investment decision (FID) conventional oil projects are now commercial under $60/barrel Brent, compared with 50% a year ago. “These projects are crucial to offset global demand growth and declines from existing production,” it says.

Global oil supply research director Patrick Gibson says: "A total of 13mn b/d of new supply could be developed from both tight oil and conventional projects by 2025. Global breakeven costs for these developments have fallen by $19/b to the current weighted average of $51/b since the peak in 2014 and by $8/b over the past 12 months."

Of the 13mn b/d, 9mn b/d are commercial at $60/b Brent and are mostly US tight oil, with productivity improvements and cost deflation in the key growth plays. The big winners are the incumbent operators in the Mid-Continent and Permian Basin: US independents such as EOG, Pioneer, Continental and Apache; and among the majors, ExxonMobil and Chevron.

"In contrast, the majority of conventional pre-FID projects are not commercial at $60/b," says Harry Paton, research analyst for Wood Mackenzie. “If prices remain at around $50/b, then many major conventional projects are at risk of deferral or cancellation."

Wood Mackenzie's breakeven analysis shows that deepwater projects are highest on the cost curve with many projects out of the money. Angola and Nigeria deepwater have already suffered cancellations and more projects are at risk; as are as some US Gulf of Mexico projects. Brazil in contrast holds its own in the middle of the cost curve with a weighted average breakeven of $50/b owing to “world-class projects of scale such as Libra.”

William Powell