Tuesday, July 5, 2022

New oil more competitive, significantly cheaper to produce – Rystad Energy

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Following its latest analysis of supply costs within the upstream sector, Rystad Energy, a research and business intelligence company based in Norway, has found that new oil discoveries are now more competitive and cheaper to produce.

Expounding in this regard, it noted that the average breakeven price for new oil projects has dropped to around US$47 per barrel – down around 8% over the past year and 40% since 2014, with offshore deepwater remaining one of the least expensive sources of new supply.

In its analysis, Rystad said its cost of supply curve for liquids indicates that back in 2014, an oil price of close to US$100 per barrel was required to produce 100 million barrels per day (bpd) in 2030. By 2018, the required oil price was closer to US$55 per barrel, and in 2020, it dropped to US$45 per barrel. The business intelligence firm noted that its latest estimate remains unchanged this year at US$45 per barrel for 100 million bpd of production in 2030.

Further to this, Rystad said the required oil price to produce 100 million bpd in 2030 is unchanged in its analysis, despite the declining average breakeven price of new oil projects, as it finds that the potential supply for 2030 has decreased since last year due to delays in sanctioning activity and conservative shale producers.

In 2014, the consultancy group said it estimated that the total 2030 liquid potential was 104 million bpd, while in 2018, this jumped considerably to 135 million bpd mainly driven by increased potential volumes from North American tight oil. However, Rystad said low activity levels in 2020 and 2021, due to the COVID-19 pandemic and a general focus on the energy transition, led to a downward adjustment in the overall liquid potential. In 2020, it said the potential 2030 supply was revised down to about 116 million bpd, and in 2021 it was revised further to about 113 million bpd.

“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. 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,” says Espen Erlingsen, head of upstream research at Rystad Energy.

Overall, Rystad said the onshore Middle East is the cheapest source of new production with an average breakeven price of around US$32 per barrel. It said this is also the segment with one of the largest resource potentials while adding that offshore deepwater is the second cheapest source of new production, with an average breakeven price of US$36 per barrel. It noted as well that Russia onshore continues to be one of the more expensive resources due to the high gross taxes in the country.

Though Guyana is a relatively young oil producer, its Stabroek Block discoveries have been highly praised for having a low cost of production. Hess Corporation which holds a 30 percent working interest in the offshore concession has said the three oil developments sanctioned so far in Guyana – Liza Phase 1, 2, and Payara, have a Brent breakeven oil price of between US$25 and US$35 per barrel which remains integral to the company’s growth plans.

The relatively low cost of producing crude in Guyana continues to make the South American country a favourable investment destination even with the impact of demand destruction brought on by the coronavirus.

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