As oil prices move ever lower, Wood Mackenzie has assessed at what price the operating cash flow from producing oil fields turns negative. Negative operating cash flow can be an immediate brake on production. While Wood Mackenzie does not think this floor will necessarily be triggered, this latest analysis serves to gauge where it is and how much supply would be affected at what level. Wood Mackenzie concludes that a Brent price of US$40 a barrel ($/bbl) or below would see producers shutting in production at a level where there is a significant reduction of global supply. US onshore ultra-low production volume 'stripper wells' could be first to be cut.
Robert Plummer, Corporate Research Analyst for Wood Mackenzie explains: "The cash operating cost for oil fields becomes very important as prices producers can achieve for the oil they produce nears the marginal point. It can be a more immediate brake on production, although when and how that might be reached is never easy to predict.
“The point at which producing oil fields become cash negative is key in assessing how far the oil price could fall. Once the oil price reaches these levels, producers have a sometimes complex decision to continue producing, losing money on every barrel produced, or to halt production, which will reduce supply,” Mr Plummer continues.
Wood Mackenzie's analysts have mined its global database of 2222 oil producing fields, which account for total liquids production of 75 million bpd and determined at three oil price points, the impact on oil production and percentage of global supply which will turn cash negative:
- At US$50 a barrel Brent, only 190 000 bpd of oil production is cash negative, representing 0.2% of global supply. Seventeen countries supply oil that is cash negative at US$50, with the main contributors being the United Kingdom and the United States.
- At US$45, 400 000 bpd is cash negative, or 0.4% of global supply. Half of this production is from conventional onshore production in the US.
- At US$40, 1.5 million bpd is cash negative, or 1.6% of global supply. At this point, the biggest contribution is from several oil sands projects in Canada. Tight oil production only starts to become cash negative as the Brent oil price falls into the high US$30’s.
"Being cash negative simply means that the production is more costly than the price received. This does not necessarily mean that production will be halted. The first response is usually to store oil produced in the hope that the oil can be sold when the price recovers. For others the decision to halt production is complex and raises further issues," Mr Plummer explains. "Thus, there is no guarantee these volumes would be shut-in. Operators may prefer to continue producing oil at a loss rather than stop production - especially for large projects such as oil sands and mature fields in the North Sea."
Wood Mackenzie says the key question for oil price watchers seeking to identify a floor for the oil price is where will production be shut-in first? Concentrating on a scenario of Brent oil price of US$40, its analysis highlights where and what type of production is most likely to be examined:
- US Onshore production: There is approximately one million b/d of oil production that comes from what are called 'stripper wells'. Many of these produce only a few barrels/day and operating costs vary between US$20 and US$50. We believe that once the cost of collecting the oil from these wells becomes marginal, shut-ins are likely.
- Canada Oil Sands: Turning on and off bitumen production is a complex and lengthy process. Stopping the injection of steam into oil sand reservoirs would result in a long and expensive re-start. Interestingly, a significant part of the operating costs of oil sands is fuel for the extraction processes, so at low oil prices, operating costs may be lower than current levels.
- United Kingdom: Many North Sea fields are old and are reaching the end of their lives. The decision to cease production 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. A company seeking to reduce its expenditure for the next two to three years, may prefer to operate with a small loss, rather than start the decommissioning process which may cost hundreds of millions of dollars.
- Heavy Oil: There are a number of heavy oil projects in Latin America, which become marginal at low oil prices, like those in Venezuela and Colombia. As governments are dependent on revenues from these fields, we may see some form of relief on royalty to ensure that production continues.
Adapted from a press release by David Bizley