The possibility of Saudi Arabia cutting oil production may pose an oxygen balloon for some oil industries, whose profitability is jeopardized with a barrel less than $ 20-25, such as the extraction of shale oil in the United States or the exploration of Canadian tar sands.
OPEC member countries will discuss on Monday how to stabilize the oil market in the midst of the coronavirus pandemic, which has slowed demand due to the restrictions on mobility imposed to try to control the expansion of the Covid-19 pandemic.
The prospect of a production cut bounced the price of oil: Texas closed the week at $ 28.34 a barrel, after having fallen below $ 20 in the previous days.
The first victim
The price war, added to the lack of demand due to the mobility restrictions imposed to stop the Covid-19 pandemic, has already claimed its first victim, the oil company Whiting Petroleum, which declared bankruptcy after running out of liquidity. .
“This firm is the first among many of the probable victims that the oil war will claim, given that a price of a barrel below $ 30 is very far from the breakeven level (break-even point) for many of the producers” , explains eToro market analyst Adam Vettese.
Whiting Petroleum, which produced 123,000 barrels a day in the fourth quarter of 2019 and whose shares had depreciated 90% in recent months, is the first US shale company to be forced to cease its activity, but, according to analysts, It could also be the first of many others.
“The shale in the United States is economically unfeasible. Some areas and plants will return when prices rise,” Standard & Poors Global Platts chief analyst Chris Midgley told CNBC.
It is estimated that in the United States, where production costs are higher than in other parts of the world, energy companies need the price of a barrel to be around $ 20 or $ 25 for production to be profitable.
If prices drop below $ 15 a barrel, “we will undoubtedly see some operators surrender and suspend production from their least productive wells,” Rystad Energy senior analyst Alexandre Ramos-Peon told Efe.
However, since more than 50% of production comes from “very recent and high-yield” wells, even lower prices, around $ 10 a barrel or less, will be required to force the suspension of those wells, Add.
The abrupt drop in prices also threatens the existence of Canada’s oil industry, the seventh largest oil-producing country in the world with almost 3.6 million barrels per day in 2019 and unable to even cover costs at current oil prices.
“Under normal conditions, the price of Texas has to be between 40 and 45 dollars” for oil extraction to be profitable in Canada, explains Efe Allan Fogwill, president and CEO of the Canadian Institute for Energy Research, an independent institution based in Calgary studying the sector.
This figure assumes a certain value of the Canadian dollar compared to that of the United States. and some discount on the price of Texas, so if the barrel “is below $ 40, there are very few opportunities to invest and achieve a reasonable return on investment,” he adds.
“In the situation we are in now, you are facing a market where you cannot even cover the cost of production in the short term,” he concludes.
An additional problem for the Canadian oil sector is the peculiarities of its production.
The main oil fields are in the provinces of Alberta and Saskatchewan, in the center-west of the country. In these fields, the crude oil is located in the so-called oil sands.
To extract the oil, producers process large amounts of crude oil-impregnated sand by injecting steam (heat and water) to liquefy the mine’s bitumen.
Furthermore, all of Canada’s oil exports go to one market: the United States.
Losses in Venezuela
Another country threatened by low prices is Venezuela, where the barrel has fallen to 1999 levels (17 dollars on average) when the average cost of production of the Venezuelan basket exceeds 18 dollars per barrel, analyst Rafael Quiroz told Efe.
In the case of Venezuelan extra-heavy crudes from the Orinoco Oil Belt, the world’s largest oil reservoir, production costs rise, in some cases, to $ 34.
“In conclusion: Venezuela is producing at a loss,” added the analyst.
The Mexican oil mix has reached its lowest level so far this century, depreciating 81.07% in the first quarter of the year and falling to $ 10.76.
Even so, President Andrés Manuel López Obrador maintains his plan to invest a total of 8,000 million dollars for the new Dos Bocas refinery, which aims to conclude in 2022 in the southeast of the country.
Brazil has a lifesaver to deal with the oil crisis: the bet by the Brazilian state oil company Petrobras for the huge pre-salt oil reserves, from which it extracts crude oil at very low prices in deep Atlantic waters.
The average cost of extracting crude oil in the pre-salt is just under $ 6 a barrel, including investment and operating costs, according to the company’s latest five-year plan.
The pre-salt is an exploitation horizon located in the very deep waters of the Atlantic Ocean off the states of Rio de Janeiro and Sao Paulo and below a two-kilometer-thick layer of salt, the reserves of which can make Brazil one of the world’s largest crude oil exporters.
Including taxes and other costs, its break-even point of production (breakeven) or minimum price that guarantees its economic viability, is $ 16 per barrel in the pre-salt and $ 20 in its general operations (including wells on land and in shallow water marine fields).
“Without a doubt, the pre-salt represents a competitive advantage for Petrobras over other companies in the sector at this time,” Rivaldo Moreira Neto, president of the consultancy specialized in the Gas Energy sector, told Efe.
For Russia, the question now is not so much how low prices are going to go, but how long they are going to stay low, according to the University of Finance expert attached to the Russian government and analyst at the National Energy Security Fund Igor Ushkov.
In his opinion, if the price drop is for a short period (of a few months), the Russian companies will not have catastrophic losses either, because along with the fall in the price, the natural resource extraction tax and export tariffs also decrease.
The most possible scenario, he adds, is for prices to remain low during the second quarter of 2020.
During this period, two processes will take place: China will increase the consumption of oil derivatives, recovering from the coronavirus, while Europe will lower the demand for quarantines, but by June, possibly, the coronavirus crisis will be overcome and Europe’s oil consumption it will also rise.
On the other hand, the supply in the oil market will decrease as more expensive projects, such as US shale oil extraction projects, will abandon the market (or cut production). and exploration of the Canadian oil sands.
According to the CEO of Gazprom Neft, Alexandr Diukov, the cost of oil extraction (production or lifting costs) in Russia ranges from $ 3 to $ 5 per barrel, figures that do not include transport and other expenses, including the tax component.
“The critical level for deposits currently in operation is below $ 15 a barrel,” said Andrei Polischuk, an analyst at Raiffeisenbank, quoted by the Russian official agency TASS, and who warns that the exploitation of new resources in the extreme east of the country or in the arctic region raises the cost of extracting a barrel of crude oil up to between 20 and 50 dollars.