Nearly 2% Of Global Crude Could Be Cash Negative at $40 Brent

Wood Mackenzie concludes that producers could start shutting in production at $40/bbl Brent crude or lower, causing a significant reduction in global supply.

A recent analysis by Wood Mackenzie found that 1.6 percent, or 1.5 million barrels of oil per day (MMbopd), of global oil supply could be cash negative on an operating basis if Brent crude falls to $40/barrel.

Wood Mackenzie’s analysis of 2,222 producing oil fields, which account for 75 million barrels per day of total liquids production, determined at three price points the impact on oil production and percentage of global supply which will turn cash negative.

The firm concluded that producers would begin shutting in production at $40/bbl Brent crude or lower, to a point where a significant reduction in global supply would result.

“The cash operating cost for oil fields becomes very important as prices producers can achieve for the oil they produce nears the marginal point,” said Robert Plummer, corporate research analyst for Wood Mackenzie, in a Jan. 9 press statement.

Production from U.S. onshore ultra-low production volume “stripper” wells could be the first to be halted. Approximately 1 MMbopd comes from these wells; many produce only a few barrels per day and have operating costs between $20 and $50.

“We believe that once the cost of collecting the oil from these wells becomes marginal, shut-ins are likely,” said Plummer.

At the $40/bbl price point, several Canadian oil sands projects are contributors to production. However, tight oil production only starts to become cash negative as Brent falls into the high $30s.

“Turning on and off bitumen production is a complex and lengthy process,” said Plummer. “Stopping the injection of steam into oil sand reservoirs would result in a long and expensive restart.”

Interestingly, a significant portion of oil sands operating costs is fuel for the extraction processes, so at low oil prices, operating costs may be lower than current levels, Plummer noted.

Wood Mackenzie also found that, at $50/bbl Brent, only 190,000 bpd of oil production, or .2 percent of world supply, is cash negative. Seventeen countries supply oil that is cash negative at $50; the main contributors are the United States and the United Kingdom. At $45, 400,000 bpd, or .4 percent of global supply, is cash negative. Half of this production comes from conventional U.S. onshore production.

Being cash negative – which means that the production is more costly than the price received – doesn’t necessarily mean that production will be stopped. Typically, producers will store oil to sell when the price recovers.

“For others, the decision to halt production is complex and raises further issues. Thus, there is no guarantee these volumes would be shut-in,” said Plummer.

Instead, operators may prefer to continue producing oil at a loss rather than stop production – especially for large projects such as oil sands and mature North Sea fields. In the North Sea, deciding to halt production from fields 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,” said Plummer.

A company looking to reduce expenditure for the next two or three years may prefer to operate with a small loss versus decommissioning a field at the cost of hundreds of millions of dollars.

In Latin America, where a number of heavy oil projects become marginal at lower oil prices, governments dependent on these revenues may provide royalty relief to producers to maintain that production.

The slide in global crude production prices has prompted producers to cut capital expenditures and drilling plans, leaving many to wonder how low prices would go and if the Organization of Petroleum Exporting Countries (OPEC) would budge from their pledge not to cut production. Saudi Arabia and its Gulf OPEC allies haven’t shown any sign of considering a cut to boost oil prices, despite oil dipping below $50/barrel this week, Reuters reported Thursday. OPEC ministers and delegates have blamed non-OPEC producers such as Russia, Mexico and Kazakhstan, as well as U.S. shale and tight oil production, for the oversupply of oil in the world market.

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