Wood Mackenzie's latest global oil production analysis* indicates that 3.4 MMbbl/d of oil production is cash negative at a Brent oil price of US$35. Since the dramatic drop in prices from late 2014, there have been few halts in production – with around 100,000 b/d shut-in globally to date. According to Wood Mackenzie, the areas with the largest volumes shut-in so far have been Canada onshore and oil sands, conventional US onshore projects and aging UK North Sea fields. However, Wood Mackenzie cautions that the number of shut-ins is unlikely to increase at the rate some might expect, as many producers hold out in the hope of a price rebound.
"Our latest 2016 production data indicates that with Brent crude oil prices at $35/bbl, 3.4 MMbbl/d of oil production is cash negative, which equates to 3.5% of global supply (96.1 MMbbl/d)," said Stewart Williams, vice president of upstream research at Wood Mackenzie.
Wood Mackenzie's latest study collates oil production data from over 10,000 fields and calculates the cash operating costs - identifying the price at which the fields turn cash negative, and the volume of oil production associated with this price level.
"Since the drop in oil prices from late 2014, there have been relatively few production shut-ins with less than 0.1% of global production halted so far - around 100,000 b/d globally," said Williams.
So why aren't producers turning off the taps?
"Being cash negative simply means that production costs are higher than the price that the producer receives and does not necessarily mean that production will be halted altogether,” said Robert Plummer, vice president of investment research at Wood Mackenzie. "Given the cost of restarting production, many producers will continue to take the loss in the hope of a rebound in prices. In terms of our current oil price forecast, we have recently revised our annual average to $41/bbl for Brent in 2016. 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 rationalise further investment at current prices.”
The areas hardest hit are Canada onshore and oil sands, conventional US Onshore projects and some aging UK North Sea fields. Wood Mackenzie attributes the hit on Canadian production from oil sands and conventional onshore to high costs and distance from market place. There have also been production shut-in from US 'stripper' wells (onshore, ultra-low output wells) and in the North Sea, where some operators have prematurely ceased production of aged fields.
"At a Brent oil price of $35, Canada has 2.2 MMbbl/d of production which has a negative cash operating cost - predominantly from oil sands and small producing conventional wells in Alberta and British Colombia. Venezuela is second with 230,000 b/d from its heavy oil fields, followed by the UK with 220,000 b/d," said Plummer.
"In the past year we have seen a significant lowering of production costs in the US, which has resulted in only 190,000 b/d being cash negative at a Brent price of $35,” said Williams. “In fact, the biggest reductions have been from tight oil, the majority of which only becomes cash negative at Brent prices well-below $30/bbl."
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