Report: Nearly 2 percent of global crude may be unprofitable at $40 per barrel

A recent analysis by Wood Mackenzie found that 1.6 percent, or 1.5 million barrels of oil per day (MMbopd), of global oil supply could be unprofitable on an operating basis if Brent crude falls to $40/barrel.

Wood Mackenzie’s analysis of 2,222 producing oil fields, which account for 75 million barrels per day of total liquids production, determined at three price points the impact on oil production and percentage of global supply which will turn cash negative.

The firm concluded that producers would begin shutting in production at $40/bbl Brent crude or lower, to a point where a significant reduction in global supply would result.

Production from US onshore ultra-low production volume “stripper” wells could be the first to be halted. Approximately 1 MMbopd comes from these wells; many produce only a few barrels per day and have operating costs between $20 and $50.

At the $40/bbl price point, several Canadian oil sands projects are contributors to production. However, tight oil production only starts to become cash negative as Brent falls into the high $30s.

Wood Mackenzie also found that, at $50/bbl Brent, only 190,000 bpd of oil production, or .2 percent of world supply, is cash negative. Seventeen countries supply oil that is cash negative at $50; the main contributors are the United States and the United Kingdom. At $45, 400,000 bpd, or .4 percent of global supply, is cash negative. Half of this production comes from conventional US onshore production.

Being cash negative – which means that the production is more costly than the price received – doesn’t necessarily mean that production will be stopped. Typically, producers will store oil to sell when the price recovers.

Operators may prefer to continue producing oil at a loss rather than stop production – especially for large projects such as oil sands and mature North Sea fields. In the North Sea, deciding to halt production from fields is often irreversible. Some platforms share their cost burden with other linked fields, and satellite fields are dependent on a mother platform.

A company looking to reduce expenditure for the next two or three years may prefer to operate with a small loss versus decommissioning a field at the cost of hundreds of millions of dollars.

In Latin America, where a number of heavy oil projects become marginal at lower oil prices, governments dependent on these revenues may provide royalty relief to producers to maintain that production.