WoodMac: Distressed oil keeps flowing

Far less oil production has been shut in worldwide than generates negative cash flow because of the slump in crude oil prices, reports Wood Mackenzie.

Far less oil production has been shut in worldwide than generates negative cash flow because of the slump in crude oil prices, reports Wood Mackenzie.

Analysis of the firm’s database of more than 10,000 oil fields indicates that 3.4 million b/d of oil costs more to produce than the revenue it yields with the Brent crude price at $35/bbl. So far, less than 100,000 b/d has been shut in.

The database accounts for liquids production from oil wells of 79.7 million b/d.

According to WoodMac, 2 million b/d is cash-negative at a Brent price of $40/bbl, 5.3 million b/d at $30/bbl, and 7.7 million b/d at $25/bbl.

The study points out that operators prefer to continue producing oil at a loss rather than stop production, especially for large projects such as oil sands and mature fields in the North Sea. It says production from stripper wells is the category most vulnerable to low prices.

“Given the cost of restarting production, many producers will continue to take the loss in the hope of a rebound in prices,” says Robert Plummer, WoodMac vice-president of investment research, noting that the firm projects an annual average Brent price this year of $41/bbl. “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 rationalize further investment at current prices.”

WoodMac estimates that output of at least 30,000 b/d has been shut in in Canada, where long transport distances and low oil quality create large price discounts to international prices. Most of the shut-ins have been in Alberta and British Columbia. Production of heavy oil has been shut in, but no major oil sands project has closed.

In the US, cost reduction and elimination of the West Texas Intermediate price discount to Brent have improved producers’ margins in a phenomenon magnified by high royalty rates, WoodMac says. The combined effects have lowered the cash break-even price by $10/bbl or more onshore. Because broad well abandonment requires investment, WoodMac expects US shut-ins to be “short-lived.”

Operators in the UK North Sea shut in six oil fields in 2015, lowering production by just less than 13,000 b/d.

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