$100 breaking point

Published at 08:48 17 Apr 2013 by . Last edited 11:17 22 Aug 2019.

In our latest In Focus report, written in conjunction with guest author Maarten van Mourik and using field data provided by Petrologica Ltd., we examine the rising costs facing the global oil industry.

At the beginning of this decade, when supply and demand balances started to tighten, the oil industry faced its first supply challenge in 25 years. The three key pillars of the 1970s supply response – Alaska, Mexico and the North Sea – were all in steep decline. In 2000, these three produced 11.3 mb/d and by last year, this had declined to 3.4 mb/d.

As the easily accessible fields declined, the search for output from more challenging locations and alternative methods began in earnest. Almost anything that was once regarded as out of reach is now being produced. Tar sands, tight oil, deepwater, ultra-deepwater, pre-salt ultra-deepwater, biofuels and so on. There have even been demand-side adjustments, with some fuel-switching to natural gas and outright demand contraction, as a result of both high prices and a long lasting economic downturn. Yet, today, the oil market balances at $100 per barrel.

Looked at another way, oil prices more than doubled from 2005 to 2012 (11% p.a.) but non-OPEC supplies (ex. biofuels and refinery processing gains) only rose by 2.9% over those years (0.4% p.a.). Even throwing in OPEC only marginally improves the picture, with global supplies growing by 4% over that time period (0.6% p.a.). Worse still, E&P CAPEX has exploded. Between 2005 and 2012, CAPEX increased from just above $200 billion to $600 billion (16% p.a.). Not surprisingly, the returns for the oil majors actually peaked in 2005, when Brent averaged $54 per barrel. As our analysis shows, newer finds are smaller, decline rates have stepped-up as the asset base has matured and fields require more CAPEX spending on maintenance. This has led to the search for newer higher cost basins to replenish the losses elsewhere, resulting in sharply higher breakeven prices for oil majors, with their free cash flow halving since 2005.

As we find in this focus piece spanning costs and decline rates across conventional basins, remote areas such as the Arctic and East Africa, deepwater fields, tight oil plays and unconventional resources like oil sands, production costs for the oil industry has been rising by around 13% p.a. over the past 10 years. At the same time, decline rates have stepped-up, not just in old fields, but also in the relatively new ones. We find that even after infield efforts, deepwater fields decline by 12-15% per year, while tight oil fields decline at a heftier 50-70% in their first year. To finance the costlier production, companies have used up their free cash flow or have racked up significant amounts of debt, particularly US independent producers, which points towards a slightly unsustainable long term model.

Increasingly, hard to extract oil and unconventional oil is filling the gap at the margins and it will continue to do so at the right oil prices. That is the crux today – if oil demand continues to grow at around 1 mb/d per year, the oil market balances at around $100 per barrel. The world is not running out of oil, but the fact is that marginal costs of extraction have risen several fold over the past 10 years and, despite technological progress, costs have not come down materially. On the contrary, overall costs for companies are on the rise, with security, equipment and labour costs all increasing. Ultimately, a sustained drop in oil prices below $100, particularly relevant in the current market, would have to be driven by demand falls, rather than because of the commercialisation of tight oils or deepwater as many in the industry posit, as the cost pressures are already too high and worse, are still rising.

Log in to download

Other In Focus publications

The oil world in 2019

Published 10 months ago

2019-01 Oil - In Focus - The oil world in 2019 cover
We use this 'In Focus' to identify and analyse six themes that we believe will shape the oil worl..

Read more

The oil world in 2018

Published 1 year ago

2018-01 Oil - In Focus - The oil world in 2018 cover
We use this 'In Focus' to identify and analyse 10 themes that we believe will shape the oil world..

Read more

The oil world in 2017

Published 2 years ago

2017-01-05 The oil world in 2017 cover
We use this 'In Focus' to identify and analyse 10 themes that we believe will shape the oil world..

Read more

Cracking China's teapots

Published 3 years ago

Cracking China's teapots cover
The Chinese economy will slow further in 2016. The correction in the real estate markets, and gov..

Read more

The oil world in 2016

Published 3 years ago

The oil world in 2016 cover
We use this 'In Focus' to identify and analyse 10 themes that we believe will shape the oil world..

Read more