Power Up: Surprise! Oil development costs have fallen

Oil development costs have fallen in 2021, a rather surprising and ironic fact of life that comes just as the world doubles down on its move towards decarbonisation and renewable energy.

According to Rystad Energy’s annual cost of supply analysis, the average breakeven price for new oil projects has dropped to about US$47 per barrel, down 8% over the past year and 40% since 2014.

While offshore deepwater developments remain the purview of major oil companies due to the higher upfront cost of exploration and development, they also remain one of the least expensive sources of new supply on a per barrel basis.

This actually makes sense when you consider that by and large, the simple, highly-productive onshore or shallow offshore fields have already been discovered and what’s left are more complicated projects such as shale oil.

By contrast, while exploration for deepwater projects is more expensive, there are still highly-productive fields that have yet to be discovered and only the most attractive will draw investment decisions.

However, Rystad noted that the required price to produce 100 million bpd in 2030 remains unchanged as the potential supply for 2030 has decreased since last year due to delays in sanctioning activity and conservative shale producers.

In 2014, it estimated that the total 2030 liquid potential was 104 million barrels per day. This jumped to 135MMbbl/d in 2018 due to the increased potential volumes from North American tight oil before falling to about 113MMbbl/d due to the Covid-19 pandemic and a general focus on the energy transition.

Tight oil supply potential in 2025 has also tightened up from the energy consultancy’s estimate of 22MMbbl/d in 2018 to the current 16MMbbl/d due to the sharp reduction in activity during 2020.

“As the theoretical supply in 2030 exceeds the demand trajectory by more than 10 million bpd, climate policies should be more demand-focused rather than supply-focused,” Rystad head of upstream research Espen Erlingsen noted.

“Supply cuts enacted within one country will largely be countered by supply increases from other countries, while demand cuts are not met with new sources of demand.”

Oil prices slip

Crude oil prices have slipped in the past week as forecasts that production will increase in the coming months and rising COVID-19 cases in Europe outweighed lingering concerns about tight inventories.

The Energy Information Agency predicted that high oil prices could provide a strong incentive to boost production, particularly in the US shale sector.

It expects Brent crude prices to trade around US$71.50 per barrel in 2021 and US$79.40 in 2022.

This is backed by OPEC Secretary General Mohammad Barkindo, who forecast that oil could go into surplus as early as December and that the market would remain oversupplied next year.

Reuters reported that OPEC had last week cut its world oil demand forecast for the fourth quarter by 330,000 bpd from last month’s forecast, as high energy prices hampered economic recovery from the COVID-19 pandemic.