Stewart Williams, Vice President of upstream research at Wood Mackenzie explains: “Our latest 2016 production data indicates that with Brent crude oil prices at US$35 per barrel ($/bbl), 3.4 million b/d of oil production is cash negative, which equates to 3.5% of global supply (96.1 million b/d).”
Wood Mackenzie’s latest study collates oil production data from over 10,000 fields and calculates the cash operating costs – identifying the price at which the fields turn cash negative, and the volume of oil production associated with this price level.
Mr Williams continues: “Since the drop in oil prices from late 2014, there have been relatively few production shut-ins with less than 0.1% of global production halted so far – around 100,000 b/d globally.”
So why aren’t producers turning off the taps? Robert Plummer, Vice President of investment research at Wood Mackenzie explains: “Being cash negative simply means that production costs are higher than the price that the producer receives and does not necessarily mean that production will be halted altogether. Curtailed budgets have slowed investment which will reduce future volumes, but there is little evidence of production shut-ins for economic reasons.
“Given the cost of restarting production, many producers will continue to take the loss in the hope of a rebound in prices. In terms of our current oil price forecast, we have recently revised our annual average to $41 per barrel for Brent in 2016. The operator’s first response is usually to store production in the hope that the oil can be sold when the price recovers. For others the decision to halt production is more complex and we expect that volumes are more likely to be impacted where mechanical or maintenance issues arise and operators can’t rationalise further investment at current prices,” Mr Plummer adds.
The areas hardest hit are Canada onshore and oil sands, conventional US Onshore projects and some aging UK North Sea fields. Wood Mackenzie attributes the hit on Canadian production from oil sands and conventional onshore to high costs and distance from market place. There have also been production shut-in from US ‘stripper’ wells (onshore, ultra-low output wells) and in the North Sea, where some operators have prematurely ceased production of aged fields.
Mr Plummer elaborates: “At a Brent oil price of US$35, Canada has 2.2 million b/d of production which has a negative cash operating cost – predominantly from oil sands and small producing conventional wells in Alberta and British Colombia. Venezuela is second with 230,000 b/d from its heavy oil fields, followed by the UK with 220,000 b/d.”
Mr Williams adds in closing: “In the past year we have seen a significant lowering of production costs in the US, which has resulted in only 190,000 b/d being cash negative at a Brent price of US$35. In fact, the biggest reductions have been from tight oil, the majority of which only becomes cash negative at Brent prices well-below US$30/bbl.”