With oil prices the favourite topic to focus on at present, analyst Wood Mackenzie has looked into what price turns the operating cash flow from producing oil fields negative – something that can immediately put a brake on production levels.

According to WoodMac, its analysis of 2,222 oil fields suggests that if Brent crude falls to US $40/barrel, which is entirely possible, 1.6% of global oil supply could turn cash negative on an operating cost basis. While WoodMac doesn’t think this floor will necessarily be triggered, its analysis has made it conclude that at $40/bbl or less some producers will start shutting in production to the point where there would be a significant reduction in global supply.

Robert Plummer, corporate research analyst for WoodMac, said: “The point at which producing oil fields become cash negative is key in assessing how far the oil price could fall. Once the oil price reaches these levels, producers have a sometimes complex decision to continue producing, losing money on every barrel produced, or to halt production, which will reduce supply.”

The analyst’s nice tidy figure of 2,222 oil producing fields in its database accounts for total liquids production of 75 MMb/d and, at three oil price points, the impact on oil production and percentage of global supply which will turn cash negative is as follows:

  • At $50/bbl only 190,000 b/d of oil production is cash negative, 0.2% of global supply. A total of 17 countries supply oil that is cash negative at $50, with the main contributors being the UK and US.
  • At $45/bbl, 400,000 b/d is cash negative, 0.4% of global supply. Half of this production is from conventional onshore production in the US.
  • At $40/bbl, 1.5 MMb/d is cash negative, 1.6% of global supply.  At this point, the biggest contribution is from several oil sands projects in Canada. 

Being cash negative doesn’t mean, of course, that production would be halted. Oil can be stored, for example. For others the decision to halt production is complex and raises further issues: “Thus, there is no guarantee these volumes would be shut-in. Operators may prefer to continue producing oil at a loss rather than stop production – especially for large projects such as oil sands and mature fields in the North Sea,” said Plummer.

Concentrating on a scenario of a Brent price of $40/bbl, WoodMac’s analysis highlights where and what type of production is most likely to be examined including:

US Onshore production – There is approximately 1 MMb/d of oil production that comes from stripper wells.  Many produce only a few barrels per day and operating costs vary between $20-$50. WoodMac believes that once the cost of collecting the oil from these wells becomes marginal, shut-ins are likely.

UK – Many North Sea fields are mature and reaching the end of their lives. The decision to cease production is often irreversible, but with the region’s integrated infrastructure, the economics of a whole group of fields often has to be considered. A company seeking to reduce its expenditure for the next two to three years may prefer to operate with a small loss, rather than start the decommissioning process, which could cost hundreds of millions of dollars.