Depressed oil prices could sink high priced supplies
Anyone looking at the oil price chart over the past three months might be forgiven for thinking that they are looking at the side profile of a cliff face.
The benchmark Brent Crude has fallen from $US66.25 ($107.82) per barrel at the beginning of the year to just $US26.93 per barrel thanks to the impact of the COVD-19 pandemic and the oil price war between Saudi Arabia and Russia.
Wood Mackenzie calculated that at a Brent price below $US25 per barrel, about 10 million barrels per day, or about 9 per cent of global liquids supply, would be unable to meet production costs and government share.
“In the last downturn virtually no out-of-the money production was shut in. But in 2015-16, prices only dipped below US$45/bbl for a year, and below US$35/bbl for one quarter,” Woodmac vice president upstream Fraser McKay said.
“There is no precedent for the scale of potential shut-ins, if there is a prolonged period of low prices, for today’s asset classes. The industry’s ability to keep higher-cost barrels flowing will be severely tested.
“Longer-term, the impact of a lack of spend on maintaining existing production and capital spend to replace declines will take over as the primary driver of supply.”
The commercial intelligence provider noted that Saudi Arabia had the lowest production costs of just $US4 per barrel, while Russia requires just $US10 per barrel to meet its costs.
US production is similar to Russia’s at about $US9 per barrel. However, while its lowest cost production is subsidised or covered by gas revenues, its marginal barrels are more expensive to produce.
Woodmac noted that while both Saudi Arabia and Russia could decide their own investment and production levels, individual companies filled the same role in the US and some of them were already challenged financially before prices fell
It added that while companies, governments and other stakeholders were likely to continue producing at a loss in the short-term, output would certainly be turned off or choked back if prices didn’t rebound.
As for which supply is most at risk, Woodmac noted that Canadian oil sands required an average of $US45 per barrel to cover the cost of production before capex, though it is one of most challenging to shut-in.
Heavy oil is about $US28 per barrel, deepwater is $US13 per barrel and global tight oil is about $US12 per barrel.
Australian small cap oil companies operating in the US are among those affected by the price war.
Eon NRG (ASX:E2E) has flagged that it will implement a series of cost cutting measures including the curtailing of operations expenditures and evaluating individual well economics, which could lead to sub-economic wells being shut-in to preserve operational cashflow.
These wells will be monitored and returned to production as commodity prices increase and wells return to economic status.
The company has also released the portable electric generator powering the surface pumping unit for the Govt Kaehne 9-29 well, which has been shut in.
Eon plans to install the electric infrastructure over the next 45-60 days and the well will resume production at that time.
Likewise, Fremont Petroleum Corporation (ASX:FPL) has temporarily shut-in its oil production in Colorado and Kentucky until prices improve.
The company has also started a cost reduction program at a corporate and operational level while continuing negotiations regarding a gas offtake agreement from its Pathfinder field.
Whitebark Energy (ASX:WBE) decided to terminate the second and third stages of its agreement to acquire the Wizard Lake oil field in Canada.
The company had already acquired 60 per cent of the field on December 23, 2019 and had the right to acquire the remaining 40 per cent for $C2.8m in cash and C$2m in Whitebark shares.
This second and third stage was subject to the company arranging appropriate financing, which was not achieved due to the decline in oil prices.
Whitebark will retain the 60 per cent interest it already holds in Wizard Lake and receive 85 to 100 per cent of field income until all pro rata costs are recovered. It will also have the right of first refusal on any sale of the 40 per cent interest it does not own.
However, some companies are continuing operations, with Winchester Energy (ASX:WEL) noting recently that its current production assets continue to generate positive cashflow even at prevailing low prices.
It has brought the recently drilled and fracture stimulated White Hat 20#6 on pump at a rate of 104 barrels of oil per day, though this might improve as it continues to clean up.
This well extends the Mustang oil field with increased Fry Sand thickness to the northwest.