Plummeting oil prices may lower production worldwide

At the time of writing the oil price was at a six year low. Kim Jackson, Editor of Petroleum Review, and Marc Height look at some of the ramifications.

International oil prices heading below $50/barrel (/b) may cause some producers to cut production as their operations head towards ‘cash negative’ status. It has been suggested that around 1.6% of global oil supply could end up this way if price falls continue and the price of Brent hits $40/b.

Analysing some 2,222 oil fields worldwide, Wood Mackenzie has assessed the price at which the operating cash flow from producing oil fields turns negative, a situation that could lead to an immediate brake on production. The market analyst concludes that a Brent price of $40/b or below would see producers shutting in production at a level where there is a significant reduction of global supply. US onshore ultra-low production volume ‘stripper wells’ could be the first to be cut. 

The analysis of oil producing fields, which account for total liquids production of 75mn barrels per day (b/d), suggests that:

       At $50/b Brent, only 190,000 b/d of oil production is cash negative, representing 0.2% of global supply. Some 17 countries supply oil that is cash negative at $50, with the main contributors being the UK and the US. The decision to cease production is often irreversible, so a company seeking to reduce its expenditure for the next two to three years may prefer to operate with a small loss, rather than start the decommissioning process which may cost hundreds of millions of dollars.

       At $45/b, 400,000 b/d or 0.4% of global supply is cash negative. Half of this production is from conventional onshore production in the US.

       At $40/b, 1.5mn b/d or 1.6% of global supply is cash negative. At this point, the biggest contribution is from several oil sands projects in Canada. Turning on and off bitumen production is a complex and lengthy process, and stopping the injection of steam into oil sand reservoirs would result in a long and expensive re-start. 

Wood Mackenzie also notes that a number of heavy oil projects in Latin America would become marginal at low oil prices, like those in Venezuela and Colombia. As governments are dependent on revenues from these fields, some form of relief on royalty may be introduced to ensure that production continues.

The drop in price is due to a supply glut and low demand worldwide. At the time of writing, oil production from the Organisation of Petroleum Exporting Countries (OPEC) was steady or rising, with Platts reporting that production totalled around 30mn b/d in December, up 20,000 b/d from November.

The Platts figures indicate that Saudi Arabia is maintaining its output at 9.6mn b/d. The Saudi Oil Minister Ali Naimi has indicated that the country has no desire to curtail production, even if prices fall to $20/b. In an interview with Middle East Economic Survey he was reported to have said that higher prices mean that less efficient producers take up market share, and that ‘high-efficiency producing countries [like those in OPEC] are the ones that deserve the market share.’

Commentators have suggested that OPEC’s motives are both to take high-cost producers out of the market, and that there is also a political dimension to put further pressure on countries such as Russia and Iran. There is also speculation that a drop in Libyan output might go some way to lowering the rate of falling prices.

The International Energy Agency’s Maria van der Hoeven argued that the drop in oil prices offer a once-in-a-generation chance to put a price on carbon emissions and reduce reliance on fossil fuels.