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Europe United Kingdom
Oil & Gas
24 February 2009
European Integrated Oils
The cost of producing oil
Lucas Herrmann, ACA
Research Analyst
(44) 20 754 73636
lucas.herrmann@db.com
Elaine Dunphy, ACA
Research Analyst
(44) 207 545 9138
elaine.dunphy@db.com
Adam Sieminski, CFA
Strategist
(1) 202 662 1624
adam.sieminski@db.com
Fundamental, Industry, Thematic, Thought Leading
Deutsche Bank Company Research's Research Committee has deemed this work
F.I.T.T for investors seeking differentiated ideas. Here our European integrated oil
team provides insights into the cash and marginal costs of oil production. It
concludes that against the backdrop of a faltering oil price it is not just demand
that is at risk of significant disappointment; at current oil prices project deferrals
and an acceleration in the 4-6% underlying pace of natural decline stand to drive a
more rapid than expected correction in the supply/demand balance for crude oil.
Deutsche Bank AG/London
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
FITT Research
Top picks
Total SA (TOTF.PA),EUR37.75 Buy
Royal Dutch Shell Plc (RDSb.L),GBP1,597.00 Buy
Demand collapses
84.5
85.0
85.5
86.0
86.5
87.0
87.5
88.0
88.5
89.0
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
mb/d 2008 Forecast 2009 Forecast
Source: IEA
Oil is a declining asset (mb/d)
60
65
70
75
80
85
90
95
2008 2009 2010 2011 2012 2013 2014 2015
mb/d Onstream Reserves growth Under development
Probable Other discoveries Yet-to-find
Source: Wood Mackenzie
UK cost curve ($/bbl)
0
10
20
30
40
50
60
70
80
90
100
3
73
242
457
989
1078
1321
1558
1604
1769
1821
1903
2198
2376
2622
2813
2926
3333
3368
3492
3767
3968
4117
4194
4331
4380
4693
4810
4851
5007
5112
5324
5376
5414
5459
5592
5642
5721
5778
$/bbl
132kb/d and
413mb
uneconomic
below $30/bbl
70kb/d and
272mb
uneconomic
below $40/bbl
Cumulative resource mbbls
Buzzard ($6.1/bbl)
Schiehallion ($12.2/bbl)
Forties ($22.2)
UK - Average OPEX cost $14.19/bbl
132kb/d and 413mb uneconomic below $30/bbl
70kb/d and 272mb uneconomic below $40/bbl
Source: Wood Mackenzie: Deutsche Bank estimates
Non-OPEC decline rates 2000-8E
0% 5% 10% 15% 20% 25%
FSU
China
Latin America
US Onshore
Canada
Other Asia
Africa
Middle East
Non-OPEC average
Norway
Australia
US Offshore
UK
Source: IEA
Fundamental: The risks around future oil supply have risen sharply
The abject collapse in world economies has seen the markets’ previous obsession
with supply quickly switch to one which at times seems similarly myopic around
demand. Yet in markets where the surge in costs and taxes in recent years have
meant that the price required to extract crude oil has dramatically risen, our sense
is that it is not just global demand estimates that are at risk of reduction.
Industry: Breaking down the global cost curve
Using Wood Mackenzie’s extensive database we have sought to obtain a better
understanding of today’s cash costs of oil production as well as the oil price now
required for growth investments to prove economic. In doing so we have looked
not just at average cash costs by country but also the cost curves within the more
mature, higher cost oil producing regions themselves. We also assess the fullcycle
economics of investing in today’s growth regions.
Thematic: Cash economics work; full cycle economics don’t
Our analysis suggests that the current cash-breakeven cost for non-OPEC supply
is c.$12/bbl rising to c.$15/bbl in the higher cost, more mature basins of the UK,
Norway, Alaska and (because of extraction taxes) Russia. Unsurprisingly, Canada’s
oil sands represent the high cost barrel requiring an average WTI oil price of at
least $28/bbl for cash-breakeven. We estimate that, excluding the US onshore for
which granular data is limited, under 1mb/d of production would be operating at a
cash loss given an oil price of c.$30/bbl. Short term oil prices can fall further.
Thought leading: Oil is a wasting asset
Oil is, however, a wasting asset and from examination of growth provinces and
indeed the impact of past cycles on production from mature basins, a supply
response seems patently apparent. We estimate current costs dictate a price of at
least $60/bbl is now necessary to justify growth investment in Angola, the GoM,
Brazil and Nigeria’s deepwater. Moreover, at least 1mb/d of existing supply now
appears at risk as decline rates accelerate over the next 1-2 years.
In the short term, there is no magic bullet; non-OPEC keeps producing
Overall, our conclusion is that in the short term oil prices would likely have to fall
to $20/bbl and below before non-OPEC was at risk of shutting-in material supply.
However, with investment now falling, not least as the financial crisis impacts a far
more significant independent sector, the downside risks to supply forecasts are
increasing; and not just in the medium term. Whilst this analysis is not
concentrated on the corporates against the weak oil price backcloth it is clearly the
lower-cost producers whose earnings should prove better protected. Amongst the
majors Total and BG Group look by far the best placed.
Table of Contents
Executive Summary........................................................................... 3
Oil is an asset in decline............................................................................................................3
Recommendations...................................................................................................................4
Valuation ..................................................................................................................................4
Risks ........................................................................................................................................4
Oil is a wasting asset ........................................................................ 5
Not only demand is pressured in falling price environment......................................................5
Raiding the database.................................................................................................................7
The high level view on OPEX by country ..................................................................................8
Where is cash breakeven? .............................................................. 11
Unsurprisingly, the more mature the higher the cost .............................................................11
The UK - We see limited risk of shut-ins at prices above $30/bbl ...........................................11
Norway – less vulnerable than the UK but ……. .....................................................................12
Alaska – Economics comfortable at a price down to $20/bbl .................................................13
Russia – Domestic no problem; exports a different story.......................................................14
Canada oil sands – simply high cost (but gas matters a lot)....................................................14
US Onshore – History says 1mb/d at risk already ...................................................................15
Mature basins: Decline rates to accelerate? ................................. 16
The impact on growth in mature regions is likely negative .....................................................16
The implications for growth regions ............................................. 19
Investment is about costs as much as price...........................................................................19
What drops out – at least $60/bbl is needed for a growth barrel ............................................20
Brazil – avg. breakeven $42/bbl (but new projects different story) .........................................21
Gulf of Mexico – low cash cost but growth vulnerable...........................................................22
Nigeria – high costs and riskier operating environment ..........................................................23
Angola – it simply doesn’t work at current costs and prices...................................................24
Where to from here for costs?........................................................ 26
Are we seeing light on the horizon?........................................................................................26
Cost and the companies ................................................................. 30
The pressure is on…...............................................................................................................30
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