In the last few old ages, US crude oil production has soared above 6.5 mb/d, the highest since 1996, thanks mostly to hydraulic fracturing fracking combined with horizontal boring that have allowed shale hydrocarbons to be produced more economically. The rapid gait of development has fuelled thoughts of energy independency in the US and a widespread belief that shale production will revolutionize an otherwise ailing non-OPEC supply. In bend, this has led to suggestions of a paradigm displacement lower in future oil monetary values, besides reflected in the back terminal of the oil hereafters curve, which has been significantly down relation to the forepart.

In our position, shale oil is non traveling to return us to an epoch of inexpensive oil. While the short lead times to convey production online from when the first well is drilled plants in favor of shale, the capital intensive nature of the industry has driven overall costs well upwards.

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Our digest of assorted cost informations shows that to keep current growing rates, the US shale industry is likely to hold to pass close to $ 100 billion per annum, interpreting into a brawny oil monetary value required to pull off hard currency flows. While production itself can breakeven at around an norm of $ 65 per barrel ( WTI ) , adding in the assorted upfront capital costs makes the entire variable cost far more expensive, taking breakevens good into the $ 80s ( WTI ) for some shale dramas. The altering regulative environment is besides adding to costs for some manufacturers.

Not surprisingly, assorted studies of oil and gas company CAPEX reveal that North America is taking the planetary addition in E & A ; P disbursement this twelvemonth. We believe that a bead in oil monetary values to $ 70 per barrel ( Brent ) would take some $ 60 billion out from the system, worth a full twelvemonth ‘s worth of CAPEX in unconventional oil across the US. Alternatively of turning, overall US production would so flatline at best, if non get down to taper downwards. By our computations, a Brent monetary value of $ 88- $ 93 per barrel is required to bring forth adequate hard currency flow for current US CAPEX spend.

The rapid response of shale oil manufacturers to the crisp autumn in oil monetary values seen earlier in the twelvemonth, with some quickly abandoning rigs, was a instance in point for the high breakeven monetary value. Our findings are besides supported by the monetary value degrees at which US mugwumps have tended to transport out their hedge programmes. Across 2012, over 50 % of the chief 40 US mugwumps have hedges in topographic point between $ 86- $ 97 per barrel. For 2013, the recent moving ridge of manufacturer merchandising in the market was carried out merely one time WTI monetary values climbed near and above $ 95 per barrel.

The other beginnings of new supply, Canada and Brazil, besides face lifting costs. Neither of these production methods are simple or inexpensive and so scaling up capacity harmonizing to agenda has been a important challenge with cost overproductions a revenant characteristic. On norm, current non-OPEC production tendencies reflect a double moral force, whereby geological and investing conditions have both become more ambitious.

Therefore, it is high monetary values that have led to the development of shale oil merely as it has facilitated the growing of oil littorals and sub-salt sedimentations in Brazil. If we move off from $ 90+ Brent monetary values, non-OPEC supply will be fighting once more. However, the growing in these fringy barrels are likely to set a cap on long term oil monetary values, doing any runaway addition in mean monetary values much above $ 110- $ 115 per barrel, beyond geopolitical or economic grounds, progressively hard.

Floor Information technology: SHALE OIL AND MARGINAL COST

During this US election season, there has been much argument on the run trail about US energy independency as an accomplishable end. The kernel of the statement goes as follows: North American oil and gas production is billowing to degrees where it can pass over out the current near 9 mb/d of oil imports, doing the state self-sufficient by 2020 thereby cut downing trust on the volatile Middle East. Most of this new oil is expected to come from hydraulicly fractured ( ‘fracked ‘ ) shales such as the Bakken formation in North Dakota, Eagle Ford formation in Texas and new boring in the Gulf of Mexico and offshore California.

The euphory around US shale ( the common name for ‘tight oil ‘ ) is non simply a merchandise of the election rhythm. For about a twelvemonth now, perceptual experiences have abounded in the market that the universe is one time once more awash in oil, thanks to the shale revolution. The lifting stock lists at Cushing, Oklahoma, are frequently used as the basis of this statement, disregarding the existent grounds for these physiques, which is the deficiency of appropriate grapevine substructure. The natural extrapolation from a universe awash in oil is that monetary values will fall, possibly rather aggressively, as shale revolutionises an otherwise ailing non-OPEC supply image and puts to rest the statement of peak oil one time and for all. Yet, in our position, while shale oil will be a beginning of significant new production over the following decennary, arguably the most important one, it will merely make so if the monetary value of oil does non fall excessively far. Shale oil is non traveling to be the ground that we return to an epoch of inexpensive oil, for the simple ground that if oil ( Brent ) fell below $ 90 per barrel, it would non be profitable to bring forth from these beginnings, as has already been seen earlier this twelvemonth. Equally deserving bearing in head is the higher break-even monetary value demand for other cardinal oil bring forthing states, who have late increased domestic outgo well. As we have seen over the past few old ages, the threshold for active manufacturer engagement in the market has risen towards $ 90- $ 100 per barrel, one time once more supplying a soft floor to monetary values.

However, go forthing aside geopolitical factors that could make upside spikes, the impact of shale, together with a alteration in Saudi policy towards maintaining the top in cheque, is likely to besides set a cap on oil monetary values. This leads us to anticipate longer term norm ( Brent ) monetary values to remain loosely rangebound, between $ 85-90 and $ 110-115 per barrel.

In hunt of the fringy barrelaˆ¦

Peak oil and the Hunt for new production frontiers

The construct of peak oil, foremost proposed by M. K. Hubert, shed visible radiation on how the production of rough oil, as an exhaustible resource, will make a extremum over clip and after lifting over old ages, decennaries or centuries, production will come in a stage of diminution. The important diminution in finds, which peaked as long ago as 1961, and the failure of finds made in the last few decennaries to replace the full sum of oil produced, supported frights that the universe was running out of oil. As cardinal beginnings of non-OPEC supplies ( viz. the UK, Norway and Mexico ) started top outing and so worsening aggressively, exhaustibility about became a world. The figure of elephantine field finds peaked in the early 60s and has dwindled since ( Hook et al. , 2009 ) .

Increasingly, oil big leagues have struggled to bring forth significant returns, despite oil monetary values more than duplicating since 2005. In fact, paradoxically, returns for the oil big leagues peaked in 2005, when Brent averaged $ 54 per barrel. As the plus base has matured, diminution rates have stepped-up and bing Fieldss require a higher CAPEX spend on care. This has resulted in aggressively higher breakeven monetary values required by oil big leagues, with European and US big leagues seeing their free hard currency flow halve since 2005. In fact, the bulk of the European integrated companies based their disbursement and volume projections on an mean Brent monetary value of $ 100 per barrel. Increasingly, equity analysts calculate the breakeven monetary value ( oil monetary value to be hard currency flow impersonal pre divestment but station CAPEX and dividends ) for oil big leagues to be good north of $ 100 per barrel, a significant addition from figures of around $ 80 seen every bit late as last twelvemonth. Granted, the inclusion of BG skews this breakeven upwards, but there is still small uncertainty that the huge bulk of the industry needs near, or over, $ 100 to equilibrate their outgos.

While steadily increasing oil monetary values over the last decennary incentivised important betterments in R & A ; D from the oil companies and resulted in higher CAPEX disbursement on the hunt for new Fieldss, the existent growing in oil production has non kept up in gait. Following the investing in geographic expedition, there was a explosion of growing in non-OPEC supply in 2009 and 2010 numbering about 2 mb/d across the two old ages combined. But, there was no growing in 2011 ( see Figure 4 ) , and we forecast a modest 0.3 mb/d growing across 2012 as a whole. These latest figures are wholly due to the leading public presentation of North American oil production ( see Figure 3 ) . Without the close 1 mb/d growing seen in US oil supplies, non-OPEC supply would hold languished in deep negative growing district. Clearly some of the production outages since 2010 have been geopolitical in nature, but at that place have besides been dissatisfactory public presentations in some new states ( e.g. Azerbaijan, Kazhakstan, Brazil ) and relentless high diminution rates in older countries ( e.g. North Sea ) .

The perennial failure of non-OPEC manufacturers outside the US to react to monetary value signals – and the increasing graduated table of that failure – indicates the being of structural hurdlings to production growing. As diminution rates increase in many states, issues of feasibleness and scalability make it harder for extra manufacturers to supply countervailing capacity. Furthermore, planned capacity investings might non be accomplishable at current budgeted costs. In recent old ages, substructure, stuff and work force restraints have been significantly underestimated, taking to significant cost overproductions. Rising security costs has besides played a portion, as companies have moved into states with small political stableness.

Besides important is the world that non every barrel of petroleum looks the same. The ongoing replacing of the supply base has introduced a important dissymmetry, which is the permutation of easy-to-extract barrels with difficult-to-extract 1s. Canada and Brazil are possibly the two best illustrations of the possible and challenges associated with current pockets of non-OPEC supply growing. Both states have huge militias, rank among major non-OPEC manufacturers and are involved in immense enlargement plans. Yet, both states have continued to direct signals that scaling up capacity harmonizing to agenda might be a more hard undertaking than originally thought ( see below for inside informations ) .

Shale is the new fringy barrel

Finding and developing oil from progressively disputing locations and methods has been a map of engineering and invention, which has enabled consecutive oil frontiers to be achieved costaˆ?effectively and fruitfully. Over the decennaries, important technological discoveries such as 3D seismal, horizontal boring and sub-sea completion have greatly contributed to the development of new resources peculiarly in deep Waterss. In recent old ages, the focal point has broadened from the development of oil in ultra-deep Waterss utilizing cutting border engineering, to include revisiting some older engineerings and make overing older chances. Within that context, subaˆ?surface hydraulic fracturing, combined with horizontal boring, have allowed shale hydrocarbons to be produced more economically, with the US at the bosom of this latest roar. The success of mugwumps in working natural gas shale resources utilizing horizontal boring and hydraulic fracturing paved the manner for these really same manufacturers to seek their manus pull outing a much more valuable merchandise, rough oil, from similar reservoirs. Oil boring activity has increased seven-fold from the trough, taking to the rapid commercialization of oil shale dramas, taking US rough oil production presently to the highest since 1996 ( see Appendix for inside informations on US shale plays ) .

In the US, rig efficiency has improved and extraction rates have increased, fuelling outlooks of a shale roar around the universe. The implicit in inquiry, nevertheless, is whether shale will needfully take to lower oil monetary values in the hereafter. While exhaustibility has non been a job in the oil market, as replacements have been systematically developed and engineering has progressed, steadily increasing oil monetary values are the primary factor that have enabled this passage. Indeed, clip and once more, upwards monetary value accommodation has led to scarcer and more expensive oil going the fringy barrel and shale follows this tendency.

While geographic expedition success and the shale revolution are supplying a new life for the oil industry, the sector ‘s cost curve remains high. It is the short lead times to convey production online from when the first well is drilled that work in favor of shale. Yet, the capital intensive nature of the industry has driven overall costs well higher. In fact, despite its proficient challenges and significant upfront costs and lead times, ultra-deepwater is the most material and most profitable of the new development countries, instead than shale.

A fringy cost curve for oil – where does shale sit?

Precisely specifying the cardinal monetary value degree below which investing flows become sub-optimal depends on several factors, doing fringy cost unobservable. Hence the creative activity of a fringy cost curve in the oil market is non merely fraught with inaccuracies, it besides makes small sense in a universe where the fringy manufacturer is the lowest cost manufacturer, ie OPEC. However, for the fringy cost of non-OPEC supply, a proxy step can be created from the full mean unit cost of the end product of the most expensive undertaking in a state. Consequently, in the instance of a planned greenfield upstream undertaking, it includes the costs of happening, developing and raising, fees, royalties and revenue enhancements every bit good as a return commensurate with investing and hazard. The trouble stems from the fact that costs prevarication at the meeting of unsure technological, political and economic factors, most of which are about impossible were quantify. A sensible estimate of such a curve is obtained by ranking current and possible beginnings of supply, from lowest to higher cost. The cost in Saudi Arabia is put at $ 25 per barrel ( APICORP ) . Within other OPEC states it is estimated at $ 35 per barrel. The cost of nonaˆ?OPEC conventional oil production is around $ 55 per barrel. However, those are the easy to pull out barrels of oil.

In fact, fringy cost has been lifting steadily since 2000, and has risen every twelvemonth since with the exclusion of 2009, when the planetary downswing led to a crisp autumn in input costs. In 2011 entirely, costs increased by over 15 % . Estimates for more expensive unconventional oil production scope from $ 60 per barrel for CO2 based enhanced oil recovery ( EOR ) undertakings to $ 100 per barrel for gasaˆ?toaˆ?liquids ( GTL ) and coalaˆ?toaˆ?liquids ( CTL ) undertakings. North American oil supplies lie at the higher terminal of this cost curve with both US shales and Canadian oil littorals at $ 80- $ 90 per barrel.

Fringy costs are the most valuable indicant of the monetary value required for new undertakings, peculiarly given the increasing hazard and complexness in researching unconventional militias. However, one time an oil company is already runing, fringy cost becomes less of a urgent issue, compared to variable hard currency costs based on production costs ( runing disbursals and production revenue enhancements ) . This indicates at what point it becomes uneconomic to bring forth oil, which would take to production invalids, and is more relevant for our treatment here. The conjectured supply distribution in Figure 5 implies that to equilibrate current planetary demand, a conjectural sum end product of around 88 mb/d can be produced at an mean cost of $ 72 per barrel. Given the variableness within each company ‘s portfolio, there presumptively is some production that would be introvertish even at higher degrees than the overall hard currency costs, but the hard currency cost gives an indicant of the scope of monetary values that make production viable. Even here, we find that the variable cost of the fringy barrel has risen aggressively over the last decennary. In this respect, US shale production interruptions even at $ 50- $ 75 per barrel ( WTI ) on norm depending on the different shale Wellss that make production theoretically feasible ( see Figure 6 ) .

However, funding the upfront capital costs to keep land area, to add substructure into dramas, to make the scientific discipline required to define sweet spots/completion and to drive growing together with the high running costs of fracking procedures, make the sum variable cost far more expensive. This has driven break-evens for some of the independent companies good into the $ 80s ( WTI ) . Finally, countervailing diminution in the base besides becomes an extra cost load. The nature of tight oil Wellss is really different from conventional production. For illustration, the natural diminution rate of a Bakken well is highly high, in most instances between 50 % and 70 % per annum, bring forthing a terrible autumn in end product in a field unless farther fracturing is carried out and new Wellss are brought in. And Bakken is non entirely. Judging by production consequences published by manufacturers, freshman diminution rates in unconventional basins look on the order of 50-80 % , changing by basin and even within basins. They decline steeply thenceforth, as good ( see Figure 7 ) .

Limited informations on shale dramas ( less than 5 old ages ) makes it hard to judge the long term diminution rates of these dramas, as diminutions could be higher still in different oil molecules and tight stones. Much like for natural gas, in the early old ages of boring diminutions go unnoticed as high initial rates and boring degrees lift production degrees. But one time drilling degrees subside, steep diminution rates are exposed and have served to flatten production in mature countries for gas, such as in the Barnett Shale. The technique is comparatively expensive, and is peculiarly intensive in the usage of fracturing crews and other oilfield service industry inputs. The overall degree of proficient edification is comparatively low compared with techniques that have been employed in conventional production over the past decennary. It is hence comparatively hard to keep steady additions from a given tight oil drama because, over clip, rates decline and the increasing draw on specific oilfield service crews become more burdensome once the initial stage of initial end product takeoff has passed.

Supporting the overall high cost demands, a US E & A ; P benchmark survey carried out by Ernst and Young shows geographic expedition costs increased by 40 % in the infinite of a twelvemonth – from $ 15.5 billion in 2010 to $ 21.7 billion in 2011. Development costs were $ 84.4 billion in 2011 compared with $ 61.5 billion in 2010, a 37 % addition. Combined geographic expedition development disbursement increased 38 % in 2011, with the mugwumps accounting for the largest part of the addition. The mugwumps posted an $ 11.8 billion ( or 51 % ) addition in combined disbursement, while the big mugwumps increased disbursement by $ 10.9 billion ( or 39 % ) and the integrateds increased disbursement by $ 6.5 billion ( or 25 % ) . The additions in development costs indicate that to keep current growing rates, the shale industry is likely to hold to pass close to $ 100 billion per annum, interpreting into a instead brawny oil monetary value demand to pull off hard currency flows. Therefore, in our position, the statement for lower oil monetary values driven by the growing of tight oils or oil littorals does non stack up.

In a separate survey conducted by GlobalData, oil and gas companies are set to put a record of more than $ 1 trillion in geographic expedition and production activities this twelvemonth ( a y/y addition of 13.4 % ) , with North America taking the manner. Across the part, CAPEX is set to make $ 254.3 billion, stand foring a portion of 24.5 % of the 2012 planetary sum. Upstream disbursement in North America will turn by 15.7 % to outpace the planetary mean rate of 13.4 % , with the majority of the growing coming from shale manufacturers, taging the 3rd back-to-back twelvemonth of US disbursement additions. Surveies by IHS Herold, Dahlman Rose & A ; Co, etc offer similar consequences. Thus, an oil monetary value ( Brent ) of $ 90 per barrel is a au naturel minimal demand for investings of such graduated table to be economical and justifiable.

The monetary value sensitiveness of shale

Unlike conventional oil production, oil shales are far more monetary value sensitive. For one, the budgets of US mugwumps typically fluctuate more closely with current monetary values compared with those of incorporate manufacturers, who have longer clip skylines and more stable capital budgeting. These mugwumps have been noticeable for their attempts to consistently turn company-level natural gas production, with the consequence of dejecting gas monetary values. Since each company is excessively little separately to hold an consequence on natural gas monetary values, they pursued larger volumes unrelentingly in order to turn grosss. Indeed, stockholders reward them for such behavior. However, as manufacturers discovered wet Windowss in new Fieldss at a clip when the gas-to-oil ratio started turning exponentially to record degrees, boring shifted towards liquids, with rough oil production turning steadily to stand at 6.5 mb/d, a 37 % addition since 2008 ( see Appendix ) .

Thingss started altering by the center of the twelvemonth, nevertheless. Weakening basicss and the continued overhang of autonomous debt frights resulted in a crisp autumn in oil monetary values, with prompt WTI monetary values falling by $ 30 in merely over two months by the terminal of June. Infrastructure constrictions, specifically the deficiency of grapevines linking Canada to the US and North Dakota to Cushing meant that regional petroleum monetary values were even lower, with the Canadian benchmark Syncrude trading into the late $ 50s ( see Figure 9 ) .

Furthermore, NGL monetary values had started unpluging by mid twelvemonth, since the burgeoning production growing was clearly outpacing demand for NGLs. US NGL production was one of the largest beginnings of new supply in 2010, lifting y/y by about 100 1000 b/d, and once more in 2011, when it increased y/y by over 170 thousand b/d. NGL monetary values, while non lifting every bit much as oil monetary values, had still traded significantly above natural gas monetary values throughout 2011 and early 2012 ( on norm 4x ) . Due to the bounds on volumes that can be used for spiking petroleum at a refinery and with new petrochemical workss utilizing NGLs as feedstock still a few old ages from completion, the NGL market started to go oversupplied. Therefore, with gas monetary values below $ 3 per mmbtu, WTI monetary values holding fallen towards $ 80 per barrel ( with Bakken towards $ 60 per barrel ) and NGL monetary values at $ 0.84 per NGL barrel ( uplift figure of $ 5.85 ) , manufacturers saw their full gross watercourse take a important hit ( see Figure 10 ) .

The short term oil monetary value autumn brought a rapid reaction from the US shale manufacturers. Bloomberg reported an nameless operator in the Permian Basin let go ofing two pressure-pumping crews after lower realised monetary values for merely a month and a half, with the potency for more cuts to follow if monetary values stayed at those degrees ( WTI at sub $ 80 per barrel ) . In North Dakota, Continental Resources, the most active driller in the Bakken, said it would cut down boring activity unless service suppliers agree to take down their rates, assisting to shoulder the load of lower oil monetary values. Assorted studies at the clip suggested that Conoco, Hess and Marathon Oil had reduced their Bakken rig counts over June, although none acknowledged a alteration in boring programs. With Bakken petroleum monetary values trading at a $ 12 per barrel price reduction to WTI in June ( and with gas monetary values merely below $ 3 per mmbtu ) , returns for some oil companies in the Bakken had fallen below 20 % . Areas such as the Cline shale of West Texas, the Niobrara formation of Wyoming and Colorado and the Tonkawa formation of Oklahoma, where returns are even lower, saw activity decelerate even more rapidly. While borders at Eagle Ford remained favorable throughout, evident in the continued addition in rig counts in the part, costs remain high, with land entirely selling for an amazing $ 45 1000 per acre. Should monetary values prove June ‘s low degrees once more and, possibly more significantly, depending on how long they stay at that place, it will at least supply a stress trial. Over clip, low monetary values would demo up the broad variableness in economic sciences from field to field and even within certain shale dramas, coercing some cutbacks in oil production.

The fact that merely two months of comparatively low oil monetary values brought about such a speedy response in boring activity shows non merely how monetary value sensitive shale production is, but besides the basic demand of high oil monetary values required to bring forth shale oil end product in the first topographic point. So what makes shale expensive? As highlighted above, the cost of land area, constructing out substructure, investing in R & A ; D required to define sweet spots/completion and high diminution rates all make the overall costs for shale production high. Surveies of independent US operators indicate that their boring program this twelvemonth is based on a WTI monetary value projection of above $ 82 per barrel, while manufacturers start cut downing their boring programmes south of $ 70 per barrel ( see Figure 8 ) . And, by our computations, a Brent monetary value of $ 88- $ 93 per barrel is required to bring forth adequate hard currency flow for current US CAPEX spend. Based on the above, we believe that a bead in oil monetary values to $ 70 per barrel would take out some $ 60 billion from the system, deserving one full twelvemonth ‘s worth of CAPEX in unconventional oil across the US. Alternatively of turning, overall US production would so flatline at best, if non get down to taper downwards.

Our findings are besides supported by the monetary value degrees at which US mugwumps have tended to transport out their hedge programmes. Across 2012, over 50 % of the chief 40 US mugwumps have hedges in topographic point between $ 86- $ 97 per barrel, with the mean monetary value for striking puts at $ 86 per barrel. For 2013, the recent moving ridge of manufacturer selling seen in the market was carried out merely one time WTI monetary values climbed near and above $ 95 per barrel. Of class, as dramas develop, the industry is acquiring more efficient and increasing the figure of Wellss drilled by each rig per twelvemonth. Increased efficiency is a cardinal ground that the oil rig count might non necessitate to lift well from current degrees to maintain production turning. Particularly, if downspacing trials ( i.e. boring more Wellss per acre ) are successful in the Eagle Ford and even in the Bakken, where new improved recovery techniques are being trialled, production growing could be farther. However, inflated diminution rates remain a world in shale dramas and this contributes towards a immense ball of costs for shale oil manufacturers, compared to the more conventional oil Fieldss. Equally, possible rise costs from environmental regulative alterations should non be underestimated ( see box on page 12 ) .

The other rivals

First came Canadaaˆ¦

Although the current planetary focal point in the energy infinite is clearly shale dramas, non that long ago, this place was occupied by Canada and the radical oil littorals. Between 2002 and 2007, Canadian petroleum oil end product increased steadily, lifting by a cumulative 400 1000 b/d, and most estimations pointed to an speed uping growing profile over the coming old ages, as new oil littorals undertakings become operational. Investings in 2008 topped a record $ 25.4 billion, but since so investings have fallen to under $ 10 billion yearly from 2010 onwards ( see Figure 12 ) . Indeed, the industry ran into major reverses during the downswing of late 2008 and early 2009. Several undertakings, numbering about 2 mb/d, were postponed or cancelled as the hindrances created by an overheated sector ( immense cost overproductions due to monolithic underestimate of substructure, stuff and work force restraints ) met with the challenges stemming from the crisp autumn in oil monetary values and restricted entree to recognition for some companies. As a consequence, in its mid-2009 update, CAPP cut back its estimations for oil littorals production well.

With the stabilization of the oil market over 2009 and 2010, some of the Canadian undertakings are one time once more on the skyline, and production prognosiss have turned more optimistic once more. Yet, despite the upward alteration, current production outlooks for the average term are still good below those put out in mid-2008, reflecting the long lead times involved in developing these undertakings and the delayed effects of any investing determination made today. As Figure 11 shows, oil littorals potato ( get downing of boring operations of a well ) peaked in early 2008 and fell aggressively in 2009 and have merely started retrieving over the last twelvemonth.

At the minute, initial capital outgo for new undertakings is still enormously high, depending on the method of extraction. Typical excavation, extraction and upgrading undertakings for oil littorals require at least $ 5bn investing to bring forth 100 thousand b/d of quality, refinery-ready man-made petroleum oil, though of class this varies depending on the size of the undertaking. Naturally, the operating costs vary significantly and remain at the high terminal compared to conventional rough oil operations. Natural gas remains a cardinal input in the oil sands production concatenation. Some 0.4-0.5 mcf of natural gas is required for one barrel of man-made oil in the open-mining operation, 1 mcf of gas for one barrel of man-made oil in the Steam-Assisted Gravity Drilling ( SAGD ) procedure, and 1.25 mcf/d for a Cyclic Steam Stimulation ( CSS ) operation. While the autumn in natural gas monetary values and glut in the market has come as a reprieve to oil littorals manufacturers, given that the monetary value received per barrel of bitumen is besides well lower, the overall gross watercourse still requires a high oil monetary value. The lead clip required to convey excavation undertakings into production is about six old ages, including technology feasibleness, regulative blessing, equipment purchases, building and get down up. In situ operations have the advantage that they can be designed to come on-stream in modular manner ; nevertheless, the per-barrel supply costs are similar to that of surface mined operations. While costs have declined by around 25-30 % since they peaked July 2008, the industry still needs an mean oil monetary value of about $ 85 per barrel to bring forth a full rhythm internal rate of return ( IRR ) of 12 % for the to the full incorporate new oil littorals developments. Of class, the critical monetary value for bitumen merely undertakings lies significantly lower at around $ 60 per barrel.

Once once more, the cost to an bing manufacturer is non about every bit high. There is much ambiguity in how each bing manufacturer calculates the mean cost of its fringy barrel. Our cost analysis focuses on upstream operations which takes a point-in-time attack and is inclusive of hard currency costs, revenue enhancements, royalties every bit good as Depreciation, Depletion and Amortisation ( DD & A ; A ) . We find that this leads to a just sum of comparing coherency between manufacturers across dramas and geographicss.

Our appraisal is that Canadian manufacturers with oil littorals operations consisting the bulk of their end product are confronting upstream costs on a scope from $ 43/bbl to $ 70/bbl, with most towards the upper terminal of this spectrum. As assorted equity analysts note, certain manufacturers feel confident that with oil at any degree above $ 100- $ 105, geographic expedition and production will be in full swing, with a position to increase entire production and maximizing recovery at each field. Below this, at the mid $ 80s grade, it is improbable that we would see E & A ; P at this graduated table, and operations would doubtless be cut back to a grade, though non wholly halted. If monetary values come to any portion of the scope we suggest above, so although manufacturers may still be marginally profitable, there are likely to be pockets of unprofitableness, particularly in more recent operations and undertakings. Around this grade and somewhat above it, we expect manufacturers to reduce down their E & A ; P skylines markedly and hold most operations that do non preponderantly concentrate on protecting their balance sheets, which is will be damaging to longer term production. Indeed, company studies suggest that a pure-play manufacturer in the country decreased its production by 25 % given a bead in WTI of merely under 12.5 % to $ 90 per barrel in Q3 11. The overall monetary value sensitiveness of oil littorals is reasonably apparent in the manufacturer ‘s fudging behavior excessively. For fixed monetary value contracts, hedges are placed merely under $ 100 per barrel. For the of all time popular neckband schemes, floors are being set at $ 80 per barrel with ceilings range from $ 135 per barrel to merely under $ 139 per barrel.

Furthermore, today, a different job impacts Canadian manufacturers. While planetary oil monetary values have averaged good north of $ 100 for the last two old ages, substructure constrictions, peculiarly the deficiency of takeout capacity from Canada to the US, have meant that Canadian manufacturers have continued to see down and volatile monetary values, and frequently acquire small in the manner of economic rent. With Spearhead and Enbridge ‘s lines 5 and 6 systems the lone major grapevines taking Canadian petroleum to the US, takeout capacity is far lagging behind production growing potency. Hence the inclination for Canadian classs to merchandise at important price reductions to WTI, which in bend trades at a price reduction to Brent and US Gulf Coast classs.

aˆ¦then along came Brazil

As world around the Canadian undertakings set in, the oil market found a new posting kid in Brazil, given the big discoveries in the sub-salt part. Indeed, Brazilian chances are highly rich on paper, but they have tended to let down in world. For case, back in 2007, the IEA projected that Brazilian production would make 3.27 mb/d by 2012, and yet, in their latest oil market study, the IEA expects Brazil ‘s oil production to come in at 2.21 mb/d. In 2006, the IEA expected Brazilian end product to excel 3 mb/d by 2009 ; that outlook now extends to 2016, if non subsequently ( see Figure 13 ) . In 2012 entirely, Brazil was expected to convey online an extra 760 thousand b/d of production ; nevertheless, the twelvemonth through to July has seen an mean growing of merely 5 thousand b/d ( see figure 14 ) . Petrobras itself has lowered its production marks systematically over the past few old ages as Brazilian growing continues to let down, comparative to analyst outlooks. Although in June, Petrobras announced a immense investing program of $ 236.5 billion for the 2012-2016 period, including 60 % earmarked for geographic expedition and production in the sub-salt offshore oil militias, the company lowered its end product projections through to 2020, due to lifting costs of seaward geographic expedition.

Ultimately, oil resources in Brazil are concentrated in deepwater offshore countries, where field development is associated with a high degree of undertaking hazard. Furthermore, higher than expected diminution rates at Brazil ‘s older basins are turn outing to be an extra concern for Petrobras. Broadly speech production, the development of Brazil ‘s rich hydrocarbon gift poses fiscal, proficient and managerial challenges which are much greater than norm. The slippages in conveying new Fieldss on watercourse that are happening tend to be lengthening, and holds in undertaking starts up of more than one twelvemonth have become comparatively common.

Presently, Petrobras estimates the breakeven cost of its production ( including authorities takes, revenue enhancements and operating expense ) to be in the scope between $ 45 and $ 55 per barrel. However this cost appraisal is based mostly on both the pool of bing conventional resources and current and future CAPEX placed against the premise that all of its militias will be transformed into flow grosss. The high grade of complexness involved in extraction ( 6 kilometer deep underwater ) requires expensive engineering and work force, while the being of several proficient challenges requires farther outgo to get the better of them. Besides, unlike easy entree conventional oil, there are high costs involved in acquiring the oil from offshore to onshore ( 340 to 800 kilometer ) at the proposed flow rate, and as a consequence, we expect the all-in cost to be good over $ 70 per barrel.

Furthermore, the move from the initial grant attack to production sharing contracts has resulted in a important impairment in the attraction of Brazil ‘s upstream sector for international oil companies. With Petrobras now the mandatary operator of the Fieldss, capital engagement from foreign companies has dropped and working capital overproductions are going more frequent. Environmental costs are lifting excessively, with the ANP late denoting a reappraisal of safety systems and eventuality schemes following the Gulf of Mexico oil spill in 2010. Finally, with Petrobras under authorities duty to go on puting merchandise monetary values at subsidized rates at a clip when petroleum oil monetary values have continued to lift, there have been important deficits in gross flows as a consequence.


Without monetary values averaging above $ 70- $ 80 for the past five old ages, neither the increased R & A ; D investing into engineering nor the simple economic sciences of boring in countries such as Eastern Siberia, sub-salt Brazil, deep H2O Africa or oil littorals and shale would hold been possible. In our position, the causality that shale oil will take to lower oil monetary values is a misnomer. Shale oil is practical due to higher oil monetary values as are the fringy barrels of Canadian oil littorals and sub-salt Brazil. If we move off from $ 90+ Brent monetary values, non-OPEC supply will be fighting once more. Equally though, the growing of shale oil and other barrels extracted by technologically disputing agencies have provided a beginning of solid new growing to the otherwise ailing non-OPEC supply image. Therefore, what these barrels are progressively making is set uping both the floor and a cap on oil monetary values. Their monetary value sensitiveness limits the downside, while the volumes that become quickly feasible at the right monetary value make any runaway addition in monetary values, beyond geopolitical grounds, progressively hard.