U.S. tight oil is biggest winner of cost cutting, Wood Mac says

7/13/2016

HOUSTON -- The collapse in oil prices in 2014 left many planned oil investments with high costs and not commercially viable. Two years on, and the industry has started to adapt to lower oil prices, cutting costs, and getting more projects over the economic threshold. Future commercial supplies are now increasing again.

Wood Mackenzie's recent analysis of the global oil market shows 70% of new drilling in U.S. tight oil plays and pre Final Investment Decision (FID) conventional oil projects are commercial under $60/bbl Brent. This is an increase from 50% a year ago. These projects are crucial to offset global demand growth and declines from existing production.

Patrick Gibson, global oil supply research director for Wood Mackenzie, says, “A total of 13 MMbpd 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/bbl to the current weighted average of $51/bbl since the peak in 2014 and by $8/bbl over the past 12 months.”

Of the 13 MMbpd, 9 MMbpd is commercial at $60/bbl Brent. This is more than at any point since 2009 and 1.5 MMbpd more than a year ago. Most of the 9 MMbpd is U.S. tight oil, with productivity improvements and cost deflation in the key growth plays making more tight oil economically viable.

The big winners in this dynamic are the incumbent operators in the key tight oil growth plays such as in the Mid-Continent and Permian basin: U.S. Independents such as EOG, Pioneer, Continental and Apache; and among the majors, Exxon Mobil and Chevron.

"In contrast, the majority of conventional pre-FID projects are not commercial at $60/bbl. These projects will be needed to meet demand growth into the next decade but higher prices or significant additional cost reductions are required for many to be commercial," says Harry Paton, research analyst for Wood Mackenzie.

"If prices remain at around $50/bbl, then many major conventional projects are at risk of deferral or cancellation," says Paton.

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

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