Tuesday 9 February 2016

3.4 million barrels per day (b/d) of oil production is cash negative at a Brent oil price of US$35, but the number of projects that have ceased production is minimal. With the oil price hitting a record 12-year low recently, why aren’t more producers turning off the taps? Using their Upstream Data Tool and global team of analysts, Wood Mackenzie have created exclusive insight into economics of production.

Using their global database of over 10,000 oil producing fields –which account for total liquids production of 79.7 million b/d – Wood Mackenzie have concluded that less than 0.1% of global production has stopped. This represents around 100,000 b/d shut in so far globally; a very low number considering the amount of producing wells that become uneconomic in this sustained low crude price.

What assets have stopped producing?

The areas hit the hardest have been Canada onshore and oil sands, aging UK North Sea fields and conventional US onshore projects. Oil sand projects are suffering because of their high costs and distance from the market place, while the North sea closures are mainly aged wells coming to the end of their lifespan being sacrificed to wider project economics.

Conventional US onshore projects that have turned off the taps can be accounted for by ultra-low output wells, or US “stripper” wells. This points to a lack of significant assets that have stopped producing. Wood Mackenzie's analysis highlights that this is unlikely to increase at the rate some might expect.

Why are there not more production shut-ins?

Many companies will opt to take the loss, holding out for a rebound in prices. There is a cost attached to restarting production that many will wish to avoid, offsetting the loss against capex reductions in other areas. In other areas, the logistics of halting production is too complicated and expensive to remain a viable option.

This still leaves the fact that 3.5% of 96.1 million b/d global supply is cash negative. Although companies are cutting costs in other areas as Wood Mackenzie's 2016 pre-FID insight highlights, this fall below breakeven is not sustainable in the long term for many.

Source: Wood Mackenzie