Cost of oil supply to increase

Surging levels of tight oil production in the US over the last few years has sparked increasing cost-competitiveness between conventional pre-final investment decision (FID) projects – including deepwater projects – and Lower 48 shale plays, reveals a new report by consultancy Wood Mackenzie.

Despite being hit particularly hard by the 2014 oil crash, conventional producers have made gains, with many pre-FID projects now competitive with Lower 48 breakevens, according to the analysis in the Global oil cost curves and pre-FID breakevens report.

Harry Paton, Senior Analyst of Global Oil Supply at Wood Mackenzie, says: ‘We have seen encouraging signs of improvement in conventional project breakevens. Costs have come down significantly since 2015. And the number of deepwater FIDs taken at the end of 2017 indicates a mood of quiet optimism in the upstream sector.’

Paton adds: ‘Some conventional projects already compete with US tight oil. World-class discoveries in Brazil and Guyana, for example, which have giant reserves and high-quality reservoirs, have project breakevens lower even than most tight-oil plays.’

This new cost-competitiveness has come at the expense of volumes. In 2014, Wood Mackenzie forecast that the new production supply mix would be split 50:50 between conventional projects and Lower US 48 tight oil. However, the US Lower 48 is currently more dominant, making up nearly 70% of new volumes.

Key drivers behind the ‘considerably’ lower-than-expected pre-FID output of conventionals include a number of projects being ‘uneconomic’, delayed or cancelled.

This raises two key issues – the rising cost of supply and a potential supply gap, caused by both declining legacy field production and a projected growth in demand. Wood Mackenzie believes the cost of supply is set to increase as future production will be sustained by higher-cost (above $60/b), non-OPEC sources. The analysis suggests that low-cost OPEC capacity growth will not be able to meet the gap created by declines in higher-cost, non-OPEC volumes. This higher-cost production is set to increase from 1.7mn b/d in 2017 to 5.3mn b/d in 2027. By 2035, these volumes should reach 9.2mn b/d.

Non-OPEC conventional onstream declines stabilised at around 5% in 2016. The analysis indicates that they will stay at this level through to 2020, before increasing to historic norms of 6%/y. Combine this with demand growth of around 8mn b/d and the resultant supply gap is around 23mn b/d in 2027. Key to filling this gap are volumes produced via US Lower 48 future drilling and pre-FID projects.

Paton comments: ‘When you look at the numbers in terms of total production, our research suggests the US Lower 48 will be one of the most expensive sources of supply in 2027. The cost of tight oil will rise as higher-cost new drilling is required to offset declines as core, sweet-spot acreage is drilled out. This contrasts with conventional resources themes, which benefit from longer-life assets providing a relatively cheap, stable base of production.’

US crude exports
A separate study from Wood Mackenzie looks at the challenges and opportunities facing the market and US producers and midstream operators, as new analysis shows the US is set to become the world’s largest producer – with onshore Lower 48 output expected to exceed 11mn b/d by 2023.

Commenting on the US crude exports – making waves report, Ed Rawle, Chief Economist at Wood Mackenzie, says: ‘The global crude trade landscape continues to shift as the US Lower 48 pumps more light sweet crude into the market. US exports are forecast to approach 4mn b/d by the mid-2020s, likely making the US a top five global crude exporter, with similar export volumes to Iraq and Canada.’

Most of this new output will be light sweet and ultra-light crudes. However, most US refineries are configured to process medium and heavy crudes. Without large-scale capital investment, the US domestic market can only absorb about a quarter of the additional 4mn b/d of US crude expected to enter the market in 2023, leaving the rest for export.

US crude producers with operations in the Permian Basin, Texas, could see higher values for their crude than peers, earning premium prices over the next decade versus Eagle Ford and Cushing blend crudes.

As US producers and midstream operators assess their portfolios, questions about specific crude streams will arise as they determine which are most attractive to international buyers, and which export hub is best positioned to both reach the right markets and handle the highest volumes.