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U.S. Tight Oil Holds Competitive Edge Worldwide, Says Wood Mackenzie

The oil and gas industry is adapting to sustained lower commodity prices, all to the good in the U.S. onshore, where the tight oil plays have become commercially viable at an oil price of under $60/bbl, Wood Mackenzie research has found.

An analysis of the global oil and gas market found that 70% of new U.S. drilling in tight oil is commercial at under $60/bbl, versus 50% of new drilling a year ago. Only 20% of conventional oil and gas, mostly more costly deepwater projects, may be viable under $60.

"A total of 13 million b/d of new supply could be developed from both tight oil and conventional projects by 2025," said global oil supply research director Patrick Gibson. "Global breakeven costs for these developments have fallen by U$19/bbl to the current weighted average of $51/bbl since the peak in 2014 and by $8.00/bbl over the past 12 months."

Of the 13 million b/d of new global oil supply now on the drawing board to be developed, 9 million b/d is commercial at $60/bbl.

"This is more than at any point since 2009 and 1.5 million b/d more than a year ago. Most of the 9 million b/d is U.S. tight oil, with productivity improvements and cost deflation in the key growth plays making more tight oil economically viable."

Average costs per barrel have declined by 30-40% for U.S. unconventional wells, but they are down by only 10-12% for conventional oil and gas projects, researchers found.

Costs vary by field in the U.S. onshore.

For instance, Eagle Ford Shale investments in South Texas need an average oil price of $48/bbl to break even, with some development costing as much as $93/bbl and some as low as $38. Permian Basin projects in the Wolfcamp formation need an average of around $39/bbl, with Bone Spring development averaging $37/bbl.

In Oklahoma's stacked reservoirs, the weighted average breakeven development cost was $35/bbl, making it the least expensive place to develop not only in North America, but in the world.

Bakken Shale development has fallen sharply with oil prices, and the Wood Mackenzie data illustrated why. The weighted average oil cost to breakeven in the Bakken was found to be $58/bbl, with a maximum in some areas of $84/bbl and a minimum of $44.

Total global oil and gas investments are estimated at $400 billion this year, versus $700 billion in 2014. The "big winners" in this lower price dynamic are the entrenched and better financed operators, which have continued to work and even expand in key growth areas of the Permian and the Midcontinent.

By contrast, most of the conventional projects, particularly those in the deepwater awaiting a final investment decision (FID), are unlikely to become commercial at $60/bbl prices, said Wood Mackenzie research analyst Harry Paton.

"These projects will be needed to meet demand growth into the next decade but higher prices or significant additional cost reductions are required for many to be commercial," he said. "If prices remain at around $50/bbl, then many major conventional projects are at risk of deferral or cancellation."

In fact, many pre-FID projects remain on the shelf. Between 2007 and 2013, the number of FIDs by oil and gas companies averaged 40 a year. However, only eight global projects were given the green light in 2015. Wood Mackenzie is anticipating 10 major FIDs this year.

Citing "global industry challenges, including capital constraints," Royal Dutch Shell plc and its Asian partners this week tabled indefinitely the FID for a liquefied natural gas export project that would be sited in British Columbia (see Daily GPIJuly 12). To date this year "just eight significant FIDs" have been announced, suggesting a "supply vacuum at the end of the decade," analysts with Tudor, Pickering, Holt & Co. said recently (see Shale DailyJuly 6).

Wood Mackenzie's breakeven analysis found that deepwater projects "are highest on the cost curve, with many projects out-of-the-money despite some progress on cost deflation." For instance, Angola and Nigeria deepwater already has seen project cancellations and "more projects are at risk, as are some U.S. Gulf of Mexico projects."

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