Conventional production break-evens give Lower 48 shale plays a run for their money – Wood Mackenzie

PSAC lowers drilling forecast for 2018 ConocoPhillips photo.

Analysis highlights increasing competitiveness with tight oil

The surge in tight oil production from the US over the last few years disrupted the oil market, forcing companies in conventional plays to revise, review, and optimise operations to compete with the relatively low-cost barrels being pumped from Lower 48 shale plays, according to Wood Mackenzie.

Today, new research from global natural resources consultancy Wood Mackenzie indicates that while the price crash was painful for conventional producers, they have made gains: many conventional pre-Final Investment Decision (FID) projects are now competitive with Lower 48 shale breakevens.

Harry Paton, Senior Analyst, Global Oil Supply, at Wood Mackenzie, said: “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 says that some global 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,” he said.

“In other, more mature sectors, such as the US Gulf of Mexico or the North Sea, operators have made great progress in bringing costs down and lowering breakevens.”

However, this new 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 US Lower 48 tight oil.

These days, US Lower 48 is dominant, making up closer to 70 per cent of new volumes.

“Production from conventional pre-FID projects today will be considerably lower than Wood Mackenzie’s pre-price crash forecasts,” said Paton.

“The key driver is the large number of projects which have fallen completely out of the picture because they are uneconomic and have been delayed or cancelled.”

He says that many projects now in the mix have been changed in scope. Operator mentality has shifted to “value over volume,” which brings significant cost savings, but takes a chunk out of production for many assets.

This raises two key issues: 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 (>$60/bbl), 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 1.7 million b/d in 2017 to 5.3 million b/d in 2027. By 2035, these volumes should reach 9.2 million b/d.

“Wood Mackenzie calculates that non-OPEC conventional onstream declines stabilised at around 5% in 2016. Our analysis suggests they will stay at this level through to 2020 before increasing to historic norms of 6% per annum,” said Paton.

“Combine this with demand growth of around 8 million b/d and the resultant supply gap is around 23 million b/d in 2027.”

Key to filling this gap are volumes produced via US Lower 48 future drilling and pre-FID projects. These are the future marginal cost barrels which will play an important role in setting the price over the next decade. The Lower 48, in particular, will emerge as an important marginal barrel producer.

Wood Mackenzie’s 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,” said Paton.

“This contrasts with conventional resource themes which benefit from longer-life assets providing a relatively cheap, stable base of production.”

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