The state of global demand and supply balance, cost of extraction and indeed the floor that producers tend to target, all impact the crude market prices significantly.
In this scenario, estimating the current cost of extracting crude in different regions is a hazardous assignment. This is but of significant importance as many now insist that low cost production peak has arrived. The world is graduating into a new phase — where prices need to be at a higher level to sustain output.
The London based Centre for Global Energy Studies (CGES) in a study published early last year underlined that about one third of the worldwide supply of crude oil (still) costs less than $10/ oil barrel (bbl) and nearly 90 per cent costs less than $20/bbl to produce.
In defense of its study, the CGES argued that when the price of oil was $20-30/bbl, exploration and development progressed successfully even in the most expensive areas.
It added that although the rate of cost increase has exceeded inflation, the fully built-up costs of developing and producing conventional oil, excluding taxes and royalties, in most region do not exceed $30/bbl. Even in the Canadian oil sands costs are not higher than $50/bbl, the study estimated.
What measures up to the cost of production? The CGES study says that a measure of the total cost to produce crude oil and natural gas is the upstream costs. The upstream cost includes lifting and finding costs. Lifting costs are the costs to operate and maintain oil and gas wells and related equipment and facilities to bring oil and gas to the surface.
Finding costs are the costs of exploring for and developing reserves of oil and gas and the costs to purchase properties or acquire leases that might contain oil and gas reserves.
Now as per the Energy Information Agency (EIA), the total upstream cost (lifting cost and finding cost) for producing crude oil and natural gas, 2007–2009, in 2009 dollars per barrel of oil equivalent terms, averaged $33.76 in the US. Onshore it was $31.38, whereas offshore, the cost turned out to be $51.60.
In Canada, the average was $24.76. Costs in Africa averaged at $45.32. Central and South America then averaged $26.64. The lowest cost region was the Middle East, averaging then at $16.88/bbl.
And one can’t help pointing out here is that not all the frontiers in the Middle East have been explored yet. Saudi Arabia could easily add another 150 billion barrels to its proven crude reserves. Iraq remains a virgin territory and has the potential to raise its output significantly. Strangulated by embargoes and sanctions, Iranian energy sector is far from optimal.
Market prices could definitely influence output globally. What indeed, if the markets melt? US oil production has soared, leading some forecasters to predict an impending glut.
A steep fall in oil prices would choke off production at some US fields and quickly tighten supplies, Harold Hamm, chief executive of Continental Resources, the largest producer in the Bakken shale of North Dakota told the Financial Times. “If an oversupply of oil drove the price down to $70 a barrel, it would ‘hurt’ the US industry, but would quickly correct itself because it would make marginal production uneconomic.”
Hamm then argued that prices were likely to remain around $90 to $100 a barrel for US crude, sustaining strong growth in American production. “It doesn't need to be $150 or $140,” he told the Financial Times.
This leads us to another interesting issue. What floor could oil producers afford to sustain in current circumstances. Bank of America Merrill Lynch says its preliminary spending projections for2014 place, Organisation of the Petroleum Exporting Countries kingpin Saudi Arabia’s fiscal breakeven oil price at $85 a barrel.
“This is $5 higher than the floor we had previously anticipated policy-makers would be looking to defend,” the bank said in a recently released report.
According to BofA Merrill Lynch, the level of oil production this year also provides a source of uncertainty, some of which is linked to regional geopolitical developments.
The energy world continues to oscillate between ifs and buts. And that makes it all an interesting, exciting and indeed frustrating — at times
Source:- dawn.com
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