Most global oil production still cash positive at $35/b – study

3.4M b/d of oil production is cash negative at $35/b Brent, which equates to 3.5% of global supply (96.1 million b/d)

Despite plummeting oil prices, very little global oil production has been shut in and only a small percentage is cash negative at $35/b, according to a new study by consultancy Wood MacKenzie.

oil productionOnly 3.4 million barrels per day (b/d) of oil production is cash negative at a Brent oil price of US$35 and there have been few halts in production – with around 100,000 b/d shut-in globally to date.

Stewart Williams, VP of upstream research at 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 US$35 per barrel, 3.4 million b/d of oil production is cash negative, which equates to 3.5% of global supply,” said Williams.

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.

oil productionWhy 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, VP of investment research at Wood Mackenzie.

“Curtailed budgets have slowed investment which will reduce future volumes, but there is little evidence of production shut-ins for economic reasons.

Plummer says that 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 per barrel for Brent in 2016,” he said in a press release.

oil production
Photo: Suncor Energy.

“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.

The Wood Mackenzie study 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 US$35, Canada has 2.2 million b/d of production which has a negative cash operating cost – predominantly from oil sands and small producing conventional wells in Alberta and British Colombia,” said Plummer.

“Venezuela is second with 230,000 b/d from its heavy oil fields, followed by the UK with 220,000 b/d.”

Williams says that in the past year the industry has 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 US$35.

“In fact, the biggest reductions have been from tight oil, the majority of which only becomes cash negative at Brent prices well-below US$30/b,” said Williams.