A Rystad Energy analysis of oil production costs has revealed that the average break-even price has dropped to around $50 per barrel.
A Rystad Energy analysis of oil production costs has revealed that the average break-even price has dropped to around $50 per barrel.
This represents a 10% reduction over the last two years, and 35% since 2014, making new offshore deepwater developments much more viable, Rystad said.
In 2014 Rystad had estimated that the required oil price for producing 100 million barrels per day in 2025 was close to $90 per barrel, an estimate revised in 2018 to around $55 per barrel.
‘The implication of falling breakeven prices is that the upstream industry, over the last two years, has become more competitive than ever and is able to supply more volumes at a lower price,’ said Espen Erlingsen, head of upstream research at Rystad Energy.
When it comes to breakeven prices and potential liquids supply in 2025 for the main sources of new production, Rystad Energy data shows that from 2014 to 2018, tight oil and OPEC came out on top. Back in 2014, Rystad Energy estimated the average breakeven price for tight oil to be $82 per barrel and potential supply in 2025 at 12 million bpd. In 2018, Rystad estimated an average breakeven price for tight oil of $47 per barrel and a potential supply of 22 million bpd. After 2018, the break-even price for tight oil has continued to fall, reaching a current average of $44 per barrel. However, Rystad now estimates that tight oil can potentially supply around 18 million bpd of liquids in 2025. This drop is due to the sharp reduction in tight oil production during the first half of this year. ‘The lower activity this year, and a potentially slow recovery next year, will remove tight oil supply from the market,’ Rystad said.
Between 2014 and 2018, shelf and deepwater projects experienced a cost reduction of around 30%. However, the lack of new sanctioning during the same period reduced the offshore potential liquids supply for 2025. Since 2018, break-even prices have been falling for offshore, with deepwater down 16% and shallow water down 10%.
This cost reduction puts average break-even prices for deepwater just below those of tight oil. At the same time, the potential 2025 supply from offshore developments has remained more or less the same. This makes offshore a winner out of all the supply sources over the last two years when it comes to cost improvements and supply potential.
Onshore Middle East is the least expensive source of new production with an average break-even price of around $30 per barrel. This is also the segment with one of the largest resource potential estimates. Offshore deepwater is the second cheapest source of new production, with an average break-even price of $43 per barrel while onshore supply in Russia remains one of the more expensive resources due to the high gross taxes in the country. Shelf remains the segment with the largest resource potential with 131 billion barrels of unsanctioned volumes.
One of the key drivers of the improved costs and break-even prices for upstream developments are the lower unit prices within the industry. After the 2015 oil price collapse, oilfield service companies needed to reduce the prices they charged E&P companies in order to remain competitive in the challenging market conditions, said Rystad.
