June 10, 2016
Author: Maierdan Halifu, Analyst
Publisher: Oil & Gas Financial Journal
The oil price starts rebounding from the lowest point in February 2016; however, it is still far away from its peak back in 2014. It may also take several years’ time to see that high historical oil price again. As oil prices start to increase, the question is then how offshore and shale will respond.
The Figure 1 shows the production forecast for global offshore and shale projects split by liquids and gas. The production forecast is based on Rystad Energy’s base case oil price assumptions. As we can see that, the total global offshore production is about 3 times higher than the global shale production. The low commodity price has lowered the production growth for both offshore and shale projects. Rystad Energy estimates the 2016 production of offshore and shale projects will remain at the same level as in 2015. For 2017 to 2020, the production will grow at an average yearly growth rate of 1.8% for offshore projects and 10% for shale projects.
It is also important to understand the capital investment required for the production forecast mentioned above. Figure 2 shows the expected investment level for these two different sources from 2016 to 2020. As indicated on the chart, both offshore and shale projects have a large reduction in investment for 2016, due to continues heavy reductions on capital budgets from oil and gas companies to cope with low oil price. For the offshore projects, Rystad Energy forecasts the y/y (year-over-year) reduction on investment in 2016 would be 18% and 17% in 2015. On the shale side, many shale companies have projected their 2016 capital budgets based on $30 oil price scenario, which resulted in extremely low investment level for 2016. The y/y capital investment change is 40% down in 2015 and 42% down in 2016.
Rystad Energy believes, as oil prices starts to recover the investment level for both sources will start to increase. For 2017 to 2020, Rystad Energy estimates the capital investment for offshore projects will grow on an average yearly growth rate of 11% and shale projects will grow at a much higher rate of 33%.
According to the breakeven oil price for unsanctioned projects, compared to others shale is still a competitive source of supply. Figure 3 shows the average breakeven oil prices for unsanctioned projects. The average Brent breakeven price for shale project is around $71 per bbl. For offshore projects, only the offshore shelf has lower breakeven price than shale, and both offshore deep water and offshore mid water have higher breakeven oil prices compared to shale projects. The oil sand has the highest breakeven price among others averaging around $98 USD per bbl.
It is clear that compared to offshore projects, the shale projects have a great advantage by having a lower breakeven oil price and ability to make swift adjustments towards fluctuation on oil prices. As a result, when oil prices start to increase, the operators that have both offshore and shale projects prefer to ramp up the activity on their shale projects.
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Rystad Energy is an independent oil and gas consulting services and business intelligence data firm offering global databases, strategy consulting and research products.
Rystad Energy’s headquarters are located in Oslo, Norway, with additional research teams in India. Further presence has been established in Norway (Stavanger), the UK (London), USA (New York & Houston), Russia (Moscow), Brazil (Rio de Janeiro), Africa as well as South East Asia.