On the rebound

The Figure 1 shows the production forecast for global offshore and shale projects split by liquids and gas. The production forecast is based on Rystad Energy's base case oil price assumptions. As we can see, the total global offshore production is about three times higher than the global shale production. The low commodity price has lowered the production growth for both offshore and shale projects. Rystad Energy estimates the 2016 production of offshore and shale projects will remain at the same level as in 2015. For 2017 to 2020, the production will grow at an average yearly growth rate of 1.8% for offshore projects and 10% for shale projects.

It is also important to understand the capital investment required for the production forecast mentioned above. Figure 2 shows the expected investment level for these two different sources from 2016 to 2020. As indicated on the chart, both offshore and shale projects show large investment reductions for 2016 due to continued capital budget reductions by oil and gas companies as they continue to cope with low oil prices. For offshore projects, Rystad Energy forecasts the year-over-year reduction on investment in 2016 will be 18% and 17% in 2015. On the shale side, many shale companies have projected 2016 capital budgets based on $30 oil price scenario, which resulted in an extremely low investment level for 2016. The year-over-year capital investment change is 40% down in 2015 and 42% down in 2016.

Rystad Energy believes, as oil prices starts to recover, the investment level for both sources will start to increase. For 2017 to 2020, Rystad Energy estimates the capital investment for offshore projects will grow at an average yearly growth rate of 11% and shale projects will grow at a much higher rate of 33%.

According to the breakeven oil price for unsanctioned projects, compared to others, shale is still a competitive source of supply. Figure 3 shows the average breakeven oil prices for unsanctioned projects. The average Brent breakeven price for a shale project is around $71 per bbl. For offshore projects, only the offshore shelf has lower breakeven price than shale, and both offshore deepwater and offshore midwater have higher breakeven oil prices compared to shale projects. The oil sand has the highest breakeven price averaging around $98 USD per bbl.

It is clear that compared to offshore projects, shale projects hold the advantage with a lower breakeven oil price and the ability to make swift adjustments with oil price fluctuations. As a result, when oil prices start to increase, the operators that have both offshore and shale projects prefer to ramp up the activity on their shale projects.

ABOUT THE AUTHOR

Maierdan Halifu is an analyst at Rystad Energy with main responsibilities in analyzing upstream activities in North America, China, and Southeast Asia with a focus on asset modeling and valuations. Maierdan holds a MS. in Finance from the University of Gothenburg, Sweden and a BS. in Applied Mathematics from Malardalen University, Sweden. He works in Rystad Energy's Houston office.