Written by Andrea Rangel
The oil price war between OPEC and the U.S. drove out oil producers who could not keep up with low prices. However, it also led to the development and implementation of more efficient technologies for those who remained, which in turn drove production prices down.
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Breakeven points were reduced and countries like the U.S. became competitive with production costs that had only ever been seen before in the Middle East. Oil prices were at a high of $142 in June of 2008. Constant spikes in prices led to an increment in U.S. oil deposits exploted, which in turn resulted in an oversupply. This drove prices down in the summer of 2014 when Brent prices went from USD$116 per barrel in June of 2014 to USD$27 in February of 2017.
Since then Saudi Arabia has tried to drive producers out of the market by keeping prices low.
However, that has not happened yet for the suppliers who have been able to reduce operating costs and increase well productivity during these times. They have implemented new technologies and more efficient machinery to be able to compete with an oversupplied and underpaid market. For example, as mentioned in a publication by the Institute of Energy Research, in the U.S. shale oil basins’ costs are now competitive with those from the Middle East, ranging between USD$11 – USD$15.50 per barrel in the lowest cost fields. As seen in the graph below from Reuters, the lowest cost U.S. shale production areas compete with the lowest Middle East oil fields.
Overall for U.S. production, the average costs are still higher than the Middle East (see graph below), but the cost reduction curve is steep and the average costs are likely to continue to decline.
Additionally, in an article published by The Wall Street Journal, Halliburton and Schlumberger state,
“customers are using lasers and other high-tech equipment and data analytics before they drill to make sure new wells deliver the most crude for the buck.”
Now, more than ever, oil producers are reliant on new technological advances to be able to survive the price war. For this reason, additional technological advances and new tools were developed to reduce production and operating costs. For example, an ‘ABS Tool’ was developed by Serinpet Ltda., a Colombian manufacturing company, to eliminate the backspin effect in PCP artificial lift systems.
The tool was implemented and tested originally in six wells in Colombia, showing savings of $USD1.1 million in the first year. The ABS Tool allows oil suppliers to reduce the costs related to deferred losses, maintenance due to blockage of the down hole pump and its subsequent damage or the disconnection of rods. So far, more than 80 ABS tools have been implemented by different companies in Latin America, allowing producers to reduce costs and save money.
Finally, in an attempt to stabilize oil prices, OPEC has had to cut production. They agreed on cutting output by 1.2 million barrels a day, with a target of 32.5 million barrels for combined production a day. This agreement was supposed to last for six months starting in January 1, 2017. Nonetheless, in May of 2017 they announced these cuts would have to continue until March of 2018. As a result, prices are expected to remain around USD$50 for the time being, meaning operating costs need to be driven down even further to preserve profit margins.
Oil producers need to remain focused on cutting production costs and increasing technology efficiency to be able to becpme more profitable. So far, they have been able to survive the price war against OPEC but to be able to leave it behind, and reduce their breakeven point even further, they need to keep implementing more efficient technologies and to keep lowering operating costs. Innovation is the key to solving the oil market problems of today.
