As the market tries to reconcile the dichotomy between much weaker prompt Brent flat price vis-à-vis spreads, we believe it will have to wait for products fundamentals to deteriorate before another leg down in spreads. Yet, the opposite may be true for deferred spreads, as if current prices persist through H1 15, future project developments will slow materially.
Our updated cost of production chart pegs average cost of production across non-OPEC countries at $60 per barrel, although full cycle costs are closer to $100 once full infrastructure costs, and return to shareholders or interest to service debt, are included. At current prices, at least 1.5 mb/d of projects scheduled for 2016 are at risk, according to our calculations.
Canadian oil sands ($80), areas of tight oil ($76) and portions of Brazilian ($75) and Mexican ($70) output are uneconomic at current prices, or 12% of global oil production. But, oil from existing projects would only be shut in if prices fall further, as it is cash cost that matters. Lower prices will first impact projects in the planning phase, as the concern here is full cycle cost.
Already, the 2015 non-OPEC project pipeline (not including tight oil) looks extremely thin at below 1.2 mb/d, relative to around 2-2.5 mb/d of new additions seen in the past few years, and further project slippages cannot be ruled out. There is also growing risk to Russian output.
Today, the time lag between prices and a supply response has shrunk from the usual two to three years to as little as one year, largely due to tight oil being more price elastic. We estimate around 80% of the drilling effort in tight oil goes into offsetting declines, even after the substantial drilling efficiencies. So, a 20% drop in activity will result in near static output.