Oil Supply Globally: Market Price Compared to Production Costs

2016 update:Shale Breakevens drop by 20$

Long-Cycle Break-Even Costs have dropped from 77$ to 60$ in Q3/2015, they were down 55$ in 2016

In the longer term, an important cost threshold is the long-cycle breakeven. This threshold includes drilling and transportation costs (as well as internal cost of capital hurdles) and therefore reflects the price at which new wells are economically profitable. Estimates of long-cycle breakeven costs vary widely.

 

Respondents were asked to name the price at which new drilling could be expected to be profitable. Each bar captures the overall distribution of breakeven prices reported in each quarter (we only include firms that responded in all three time periods). The red line represents the average across firms (in this case we use a simple average since production data are not available from the survey).

 

Again, there exists wide variation in costs across companies. But, as with cash costs, dispersion has narrowed some, and average costs have fallen significantly since 2014. Breakeven prices averaged about $60 per barrel in the third quarter of 2015.

Given the pace of cost reduction, by early 2016, costs are likely to have declined further. Estimates for other regions tend to be somewhat lower as well.

Long-Cycle Break-Even for Shale Oil by Q3/2015

Mainstream media often speaks of the great shale gas/oil revolution and how it makes the United States more productive and a net exporter of oil. We wanted to go into more details,we compare oil production costs for US shale and global oil producers. As reason for the cheap oil we see the combination of two effects: Demand: Cheap US money supported a Chinese investment boom in factories and housing until 2012. The over-investment phase is followed by lower demand growth. Supply: The Arab countries need to maintain their social welfare systems, increased production, and - more or less deliberately - kicked high-cost fracking companies out of the market. - Click to enlarge

This figure plots self-reported long-cycle breakevens from the FRB Kansas City energy surveys of 2014q3, 2015q1, and 2015q3. The red line shows the simple average across firms, which fell from almost $80 per barrel in 2014q3 to just over $60 per barrel in 2015q1 and 2015q3. The figure also shows the range of reported breakevens for each quarter (shown by blue bars indicating the space between minimum and maximum values). The breakevens range from about $55 to about $95 in 2014q3. In 2015q1, the range moves down and narrows, with breakevens ranging from about $45 to about $75. In 2015q1, the range tightens further with minimum and maximum values of $50 and $75, respectively.

Short-Cycle Oil Production Production Costs Q3/2015

This chart includes the distinction between capital expenditures and operational expenditures. It does not indicate the costs for exploring new dwells.

Oil Production Costs Q3 2015 (Short-Cycle)

Oil Production Costs 2015 (click to enlarge)

Oil production costs and new oil supply in 2014

The Financial Times provided data of as 2014.

• Oil prices were still at 100$
• The shale oil revolution was just starting
• OPEC oil remained clearly the cheapest

Oil production costs as of 2014

The next production costs overview is provided by the producer Seadrill, Morgan Stanley Equity Research and the International Energy Agency on Seeking Alpha. Be aware that they do not speak of marginal costs, but of average costs. The difference between the two concepts might be costs for developing new technology for one “marginal unit” more. This data apparently shows a far smaller gap between OPEC and Shale oil.