Harry Paton
Wood Mackenzie Ltd.
Edinburgh
The surge in tight oil production over the last few years disrupted the oil market, forcing companies working in conventional plays worldwide to revise operations and reduce costs to compete with relatively low-cost oil from US Lower 48 (L48) shale plays.
While the oil-price crash was painful for conventional producers, they have made gains: many conventional pre-final investment decision (FID) projects are now competitive with L48 tight oil breakevens.
Wood Mackenzie Ltd. research shows operators have improved breakeven levels for conventional projects since 2015. Cost reduction has reduced project footprints via fewer wells, smaller newbuild infrastructure, and greater use of subsea tie-backs and existing infrastructure.
The industry showed quiet optimism in announcing numerous FIDs late 2017, especially for deepwater projects. WoodMac attributes these decisions to lower costs, lower breakevens, higher oil prices, and improved corporate finances.
The industry sanctioned more than twice as many projects in 2017 as 2016. WoodMac anticipates a similar trend this year with an estimated 30 FIDs likely.
Fig. 1 shows new drilling onshore US and conventional pre-FID projects together are expected to contribute more than 13 million b/d in 2027.
The difference between L48 tight oil and conventional pre-FID projects is that the conventional projects are handled at a total project level by companies incorporating several wells, requiring large initial spending. These projects can last for decades while L48 unconventional fields typically involve drilling one well at a time.
Discoveries in Brazil and Guyana already compete with L48 plays in terms of breakeven prices and production volumes. Deepwater fields with billions of barrels of oil reserves, like those in Brazil and Guyana, have low breakevens that could potentially undercut most tight oil plays.
Operators working in mature offshore areas such as US Gulf of Mexico and the North Sea also reduced costs and lowered breakevens.
Production volumes
In 2014, WoodMac forecast that new oil supply would be split 50:50 between conventional non-US projects and US L48 tight oil by about 2025. But the L48 still accounts for about 70% of new volumes.
Expected production from today’s conventional pre-FID projects is considerably lower than the volume WoodMac forecast before the oil price crash. Lower oil prices caused numerous projects to be removed from corporate plans or at least be delayed.
Operators reworked concepts for many projects, changing their scope to prioritize value over volume. This strategy cuts costs but shrinks production plans for many assets.
Consequently, operators face two key issues: the rising cost of supply and a potential supply gap. The supply gap stems from declining legacy production combined with projected oil demand growth.
Production growth in coming years will be sustained by higher-cost (>$60/bbl) supply from sources outside the Organization of Petroleum Exporting Countries (OPEC).
WoodMac calculates conventional declines outside OPEC stabilized at around 5%/year, a level expected to hold through 2020. Conventional production declines then likely accelerate to 6%/year.
A supply gap of 23 million b/d in 2027 could result from legacy field declines combined with demand growth of around 8 million b/d, WoodMac forecast.
Fig. 2 shows the changing cost curve as industry adapts to tight oil dominance in future supply.
Fig. 3 shows L48 drilling and non-US projects yet to be sanctioned are the largest projected supply sources. The global cost curve of 110 million b/d is total world capacity, including producing projects and pre-FID projects.
Industry has focused on new L48 tight oil production to meet rising demand, but worldwide legacy production still plays a big role. The US L48 likely will be among the more expensive oil supply sources in 2027, helping the competitiveness of conventional projects.
OPEC members and Russia dominate the lowest cost curves worldwide, in part because they hold large reserves. Meanwhile, new drilling into the sweet spots of L48 unconventional plays likely will become more expensive, WoodMac said.
Conventional plays worldwide benefit from longer-life assets having a relatively cheap, stable production base.
The first wave of post oil-price-crash projects either have received FIDs or are expected to receive them within the next few years. Organizers of these projects already have figured out how to reduce costs.
Operators will now turn their attention to the next wave of projects, those without firm development plans and requiring additional effort to make them commercial.
The author
Harry Paton ([email protected]) is a Wood Mackenzie Ltd. senior research analyst working with WoodMac’s global oil supply team, covering liquids production worldwide with a focus on supply cost and resulting world market implications. Having joined WoodMac’s Edinburgh office in 2014, he previously worked offshore as a Baker Hughes logging geologist. He earned an MS (2011) in science from Edinburgh University and a BS (2010) in geography and geoscience from St. Andrews University.
