Hi all,
Below is a very timely article that hit my inbox today. I think it is very relevant to HRT.
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21 August 2014
Oil Market Outlook
Thanks to a subscriber for this detailed report from DNB Markets which may be of interest. Here is a section:
Two years ago we warned that the shale oil revolution might be a threat to the most expensive oil projects around the world. We argued that the most expensive barrels risk being pushed out of the market by shale oil, just like the Russian Shtokman project was pushed out of the market by shale gas. Shale oil is not particularly cheap, it seems to require Brent prices in the 60-105 $/b range in order to be developed, but the cost curve is very different from the other resources out there.
According to the Goldman Sachs report “400 projects to change the world”, which was released on May 16, the cost curve for the shale projects range from 60-105 $/b, however 90% of the curve is flat at 80-85 $/b. According to the Goldman report, it would require an oil price of 40-100 $/b to develop 4 Million b/d of peak production from Deepwater projects, 20-110$/b for Traditional projects to reach 4 Million b/d, 40-110$/b for Heavy oil projects to reach 5 million b/d at peak and 35-110$/b to develop Ultra deepwater at peak production of 8 million b/d. It would however not require a higher oil price than 85 $/b to see peak production of US shale oil reach 10.5 million b/d. This changes the whole industry as there is no longer a requirement for oil prices to increase anymore in order to cover the market need for the rest of the decade. We hence maintain our view of the oil market that we launched two years ago when we claimed that the shale oil is a game changer for the global oil industry.
There are several quotes from Goldmans’ top 400 report we would fully agree with. Here are some of them: “As shale supply continues to grow from the US with no potential upside to oil demand, significant downside risks continue to plague oil prices”. “Shale dominates volumes and pushes high cost developments into irrelevance”. “Assuming the pace of activity in developing US shale oil reserves remains high – a scenario that is likely with oil prices above 85 $/b – the global oil market will continue to be well supplied in our view. We believe this could have material consequences for oil discoveries that sit at the top of the cost curve, which may not get developed”. “The consequence of shale developments is a displacement of projects with break-evens above 85 $/b Brent”.
It seems the oil majors are now responding to this new situation after pressure from their shareholders. The focus is shifting from volume to project economics and return focused capital discipline. Why would you in the new resource world invest billions of dollars to develop a project that requires 100 $/b or higher to break even? Studies have shown that more than 400 billion USD of global CAPEX is at risk if oil majors choose not to invest in projects that require a higher oil price than 85 $/b in order to be developed. According to Barclays Capital’s E&P spending report published in June, the oil majors will be cutting their spending by 1% in 2014. Total global E&P spending will still grow 6% to 712 billion USD according to the report, but the increase is coming from US independents and from National Oil Companies and not from the oil majors. US CAPEX E&P spending is set to increase by 9.6% as focus continues to shift towards US onshore. US CAPEX spending has now increased from about 100 billion USD in year 2010 to an estimated 164 billion USD in 2014.
