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Page added on January 10, 2015
Nearly 2% Of Global Crude Could Be Cash Negative at $40 Brent
A recent analysis by Wood Mackenzie found that 1.6 percent, or 1.5 million barrels of oil per day (MMbopd), of global oil supply could be cash negative on an operating basis if Brent crude falls to $40/barrel.
Wood Mackenzie’s analysis of 2,222 producing oil fields, which account for 75 million barrels per day of total liquids production, determined at three price points the impact on oil production and percentage of global supply which will turn cash negative.
The firm concluded that producers would begin shutting in production at $40/bbl Brent crude or lower, to a point where a significant reduction in global supply would result.
“The cash operating cost for oil fields becomes very important as prices producers can achieve for the oil they produce nears the marginal point,” said Robert Plummer, corporate research analyst for Wood Mackenzie, in a Jan. 9 press statement.
Production from U.S. onshore ultra-low production volume “stripper” wells could be the first to be halted. Approximately 1 MMbopd comes from these wells; many produce only a few barrels per day and have operating costs between $20 and $50.
“We believe that once the cost of collecting the oil from these wells becomes marginal, shut-ins are likely,” said Plummer.
At the $40/bbl price point, several Canadian oil sands projects are contributors to production. However, tight oil production only starts to become cash negative as Brent falls into the high $30s.
“Turning on and off bitumen production is a complex and lengthy process,” said Plummer. “Stopping the injection of steam into oil sand reservoirs would result in a long and expensive restart.”
Interestingly, a significant portion of oil sands operating costs is fuel for the extraction processes, so at low oil prices, operating costs may be lower than current levels, Plummer noted.
Wood Mackenzie also found that, at $50/bbl Brent, only 190,000 bpd of oil production, or .2 percent of world supply, is cash negative. Seventeen countries supply oil that is cash negative at $50; the main contributors are the United States and the United Kingdom. At $45, 400,000 bpd, or .4 percent of global supply, is cash negative. Half of this production comes from conventional U.S. onshore production.
Being cash negative – which means that the production is more costly than the price received – doesn’t necessarily mean that production will be stopped. Typically, producers will store oil to sell when the price recovers.
“For others, the decision to halt production is complex and raises further issues. Thus, there is no guarantee these volumes would be shut-in,” said Plummer.
Instead, operators may prefer to continue producing oil at a loss rather than stop production – especially for large projects such as oil sands and mature North Sea fields. In the North Sea, deciding to halt production from fields is often irreversible. Some platforms share their cost burden with other linked fields, and satellite fields are dependent on a mother platform.
“Consequently, the economics of a group of fields have to be considered,” said Plummer.
A company looking to reduce expenditure for the next two or three years may prefer to operate with a small loss versus decommissioning a field at the cost of hundreds of millions of dollars.
In Latin America, where a number of heavy oil projects become marginal at lower oil prices, governments dependent on these revenues may provide royalty relief to producers to maintain that production.
The slide in global crude production prices has prompted producers to cut capital expenditures and drilling plans, leaving many to wonder how low prices would go and if the Organization of Petroleum Exporting Countries (OPEC) would budge from their pledge not to cut production. Saudi Arabia and its Gulf OPEC allies haven’t shown any sign of considering a cut to boost oil prices, despite oil dipping below $50/barrel this week, Reuters reported Thursday. OPEC ministers and delegates have blamed non-OPEC producers such as Russia, Mexico and Kazakhstan, as well as U.S. shale and tight oil production, for the oversupply of oil in the world market.
13 Comments on "Nearly 2% Of Global Crude Could Be Cash Negative at $40 Brent"
Makati1 on Sat, 10th Jan 2015 8:43 am
RIGPORN again.
dave thompson on Sat, 10th Jan 2015 9:51 am
2% seems on the low side.
yoananda on Sat, 10th Jan 2015 10:54 am
2% of already installed rigs, right ?
what about new fields at $50 ?
I bet not many will be profitable.
How long will current field sustain the same level of production wihtout renewal ?
FloridaGirl on Sat, 10th Jan 2015 11:46 am
This article’s math is very suspect since the shale oil companies’ quarterly SEC filings showed they were cash flow negative at $100 oil.
GregT on Sat, 10th Jan 2015 1:03 pm
Thanks FloridaGirl for telling it as it is.
Rigporn is nothing more than a mouthpiece for the fossil fuel industry.
“Citigroup has collated the breakeven price of all the oil projects in the world. As you can see from this chart, most projects need the oil price to be much higher than $50 per barrel:”
https://lh3.googleusercontent.com/gF6wmnQl_9gaaAJ0E1PP_WSmjLK9cnGHAydzx7tWcAyUZGs_jNhOgLL7gVgB1-Q0EViA6k0mUkB8wsn2gsDrJL2OEHiH9e6mYK1YdRjf3LUM2WzYm35B19LVjkFcxJnBaQ
“Carbon Tracker, a thinktank focusing on the financial risks facing fossil fuel companies, separately focuses in on the different types of projects.”
“It calculates that almost $10 trillion of company investments are potentially at risk if the oil price is below $60. Arctic oil exploration projects potentially worth $2.8 trillion in capital expenditure have a breakeven price of at least $100, it estimates.”
“Shale oil projects and drilling activities in tar sands, such as those in Alberta, Canada, which the controversial Keystone XL pipeline would link to, are slightly more robust. Nonetheless, companies investing in such activities risk losing $1.2 trillion and $2.3 trillion, respectively, if the oil price is below $60. Last October, analysis from the Wall Street Journal suggested none of the US’s largest shale formations can operate at the current price of $50 per barrel.”
ht tp://www.carbonbrief.org/blog/2015/01/the-implications-of-50-dollar-a-barrel-oil-for-the-world-energy-mix/
tahoe1780 on Sat, 10th Jan 2015 1:52 pm
As I read it, he’s talking OPEX, not CAPEX; that is, the cost to lift oil from already-producing wells/sources. This drop would be more immediate than lack of new production coming on line, which is only profitable at much higher prices.
shallowsand on Sat, 10th Jan 2015 4:27 pm
Yes OPEX only. No CAPEX, exploration nor maintenance, nor G &A, nor investment return. Simply put, what it costs to keep the wells pumping, and if there is a mechanical failure, shut the well in.
US stripper well production, which is around 1 million bopd is at risk at $48 WTI.
rockman on Sat, 10th Jan 2015 5:23 pm
“…quarterly SEC filings showed they were cash flow negative at $100 oil.” The cash flow they present is net cash flow which includes outflow of capes for new projects. As shallow points out they are talking about LOE per bbl produced: Lease Operation Expense divided by net oil production (gross less royalty and production taxes). The negative reporting has nothing to do with the cost of producing existing wells. In fact we hold expect that metric to increase as companies drill less (and thus spend less) as a result of lower oil prices.
As I’ve pointed out before I’m currently producing a 400 bopd conventional well which would provide positive cash flow if oil were selling for $4/bbl. And this isn’t an old heritage well…just drilled it two years ago. Yes, a damn nice well. Why the Rockman gets paid the big bucks. LOL.
No way for me to know if their estimate is correct but it doesn’t seem unreasonable. Also good to remember that a well that might have cost $10 million to drill/complete but will ultimately net only $8 million can still have a nice positive cash flow even at very low oil prices. IOW the net cash flow from a producing well has no bearing on its profitability nor its viability to be drilled today at current oil prices.
shallowsand on Sat, 10th Jan 2015 5:34 pm
Hey ROCKMAN? Want to trade half that that 400 bopd well for 125 of them making 200? LOL. Gotta have a sense of humor to be into stripper wells!!
OTOH our 200 will be around 195 a year from now and don’t know where yours will be or where the price will be so may need some more info.
In any event that’s a heck of a well and hope you find some more like it!!
Bob Owens on Sat, 10th Jan 2015 5:36 pm
This article is way too optimistic by a country mile. In addition to the cost of oil you also have the cost of debt service, soon to go up with interest rates, you need to have a profit before anyone will invest, that profit is at least $20/barrel. Add it all up and you need to be somewhere north of $70. A lot of oil will have to shut down; future investments are likely zero. Once the oil is shut down it will not be restarted.
shallowsand on Sat, 10th Jan 2015 7:45 pm
Bob. Not true that, once shut in, wells will not be restarted. We have many wells that were shut in during previous busts that are currently clicking away. Hope we don’t have to permanently shut them down and plug them in my lifetime! Some of those holes are over 100 years old. I obviously am a proponent of a better system than just plugging out wells due to a bust. I am aware of many wells in a three county area that would probably be economic even now had the state not ordered them plugged because they became uneconomic and were therefore shut in during a previous bust. Should the states in this country have a policy which mandates elimination of shallow wells with a small foot print, due to a temporary price crash? Stripper wells produce around a million bopd in the US and are fairly stable, little decline. Think how much water, sand, road damage, etc it has taken to get ND to 1 million bopd and how much more it will take, given the high decline rates, to maintain it. Eliminate stripper wells and you are going to have to, at a minimum, do ND 2006-2014 all over again when supply and demand get back into balance.
Adamc18 on Sun, 11th Jan 2015 1:09 am
Hmmm! It is interesting that they say that because energy inputs are a large part of the costs of tar-sand production, lower oil costs will make tar-sand cheaper to produce. Does this mean they’ve solved the problem of perpetual motion?
GregT on Sun, 11th Jan 2015 1:20 am
“Does this mean they’ve solved the problem of perpetual motion?”
Nope. I’ll gladly pay you Tuesday, for a hamburger today.