Costs within the upstream sector have come down considerably in 2021, making new oil more competitive and significantly cheaper to produce, according to Rystad Energy’s annual cost of supply analysis.
Costs within the upstream sector have come down considerably in 2021, making new oil more competitive and significantly cheaper to produce, according to Rystad Energy’s annual cost of supply analysis.
The average breakeven price for new oil projects has dropped to around $47 per barrel – down around 8% over the past year and 40% since 2014, with offshore deepwater remaining one of the least expensive sources of new supply.
Rystad’s cost of supply curve for liquids indicates that back in 2014 an oil price of close to $100 per barrel was required to produce 100 million barrels per day (bpd) in 2030. By 2018, the required oil price was closer to $55 per barrel, and in 2020, it dropped to $45 per barrel. Our latest estimate remains unchanged this year at $45 per barrel for 100 million bpd of production in 2030.
‘We maintain the required oil price to produce 100 million bpd in 2030 unchanged, despite the declining average breakeven price of new oil projects, because the potential supply for 2030 has decreased since last year due to delays in sanctioning activity and conservative shale producers,’ said Rystad.
In 2014, Rystad estimated that the total 2030 liquid potential was 104 million bpd, while in 2018, this jumped considerably to 135 million bpd mainly driven by increased potential volumes from North American tight oil. However, low activity levels in 2020 and 2021, due to the Covid- 19 pandemic and a general focus on the energy transition, led to a downward adjustment in the overall liquid potential. In 2020, the potential 2030 supply was revised down to about 116 million bpd, and in 2021 it was revised it further to 113 million bpd.
‘As the theoretical supply in 2030 exceeds the demand trajectory by more than 10 million bpd, climate policies should be more demand-focused rather than supply-focused. Supply cuts enacted within one country will largely be countered by supply increases from other countries, while demand cuts are not met with new sources of demand,’ said Espen Erlingsen, head of upstream research at Rystad Energy.
From 2014 to 2018, tight oil and OPEC were the clear winners as both segments saw a reduction in the breakeven price and an increase in potential volumes. Back in 2014, Rystad Energy estimated the average breakeven price for tight oil to be $82 per barrel and the potential supply in 2025 to be 12 million bpd. Since then, the breakeven price has come down while the potential supply has increased. In 2018, Rystad estimated an average breakeven price for tight oil of $47 per barrel and potential supply of 22 million bpd. The breakeven price for tight oil has continued to fall, reaching a current average of $37 per barrel. However, tight oil production potential in 2025 has dropped from Rystad’s 2018 estimate to around 16 million bpd. This drop is due to the sharp reduction in activity during 2020. Lower activity last year, and a modest recovery this year removed potential tight oil supply from the market.
Between 2014 and 2018, offshore shelf and deepwater experienced a cost reduction of around 30%. However, the lack of new sanctioning activity over the period reduced the potential 2025 offshore liquid supply. Meanwhile, since 2018, breakeven prices for offshore deepwater fell by 30%, and for shallow water by 17%. These cost reductions put average breakeven prices for deepwater just below tight oil. At the same time, the potential 2025 offshore liquids supply has not changed much. This means offshore has been the most attractive development over the last three years.
From 2014 to date, the average Brent breakeven price for new oil sands projects has declined from around $100 per barrel to around $55 per barrel. The main reason is that many future phases will be developed as smaller, incremental brownfield expansions rather than large-scale greenfield projects.
Onshore Middle East is the cheapest source of new production with an average breakeven price of around $32 per barrel. This is also the segment with one of the largest resource potentials. Offshore deepwater is the second cheapest source of new production, with an average breakeven price of $36 per barrel. Shelf remains the segment with the largest resource potential at 126 billion barrels of unsanctioned volumes. Russia onshore continues to be one of the more expensive resources due to the high gross taxes in the country.
