Mission & Name
US Foreign Policy (Dr. El-Najjar's Articles)
Who Will Be Left Standing At The End Of The Oil
By Charles Kennedy
Oil Prices, Al-Jazeerah, CCUN,
March 4, 2016
This is a financial cold war—nothing more, nothing less.
While there are billions of reasons to cut output, and every
major producing country is reeling from the loss of revenues, some are
weathering the current bust better than others, but the devil is in the
details, and the details contain tons of variables.
cost and breakeven figures that analysts enjoy bandying can trap you in
bubble of black-and-white mathematics that is a few brush-strokes shy of a
Breakeven prices are hard to pin down, and harder
yet because they fluctuate. OPEC governments downsize their budgets, cut
social spending and put big projects on hold to lower the breakeven price.
Independent producers likewise cut spending and delay development to get
closer to a feasible breakeven. So the breakeven is elusive.
Arabia and Kuwait enjoy some of the lowest production costs in the world,
at about $10 and $8.50, respectively, according to Rystad Energy
data. Production in the UAE costs just over $12 per barrel, which is
pretty much the same as in Iran, though Iranian officials say they will
eventually be able to produce for as low as
$1 per barrel from their central fields.
But these are just
the costs of lifting oil out of the ground. State-owned oil companies
often have many more responsibilities than just producing oil. They
underpin generous spending levels by their governments, and thus any
estimate of a "breakeven" price should include the cost of those
It's hard to come up with a real breakeven point for
Saudi oil, for example, because it is responsible for funding the royal
palace and indirectly, a large number of social programs that include
everything from education to housing and energy subsidies. It's hard to
measure costs when this oil has to pay for all the luxuries of the Saudi
Quartz, if you add in all these costs that U.S. shale producers don't
have, we're looking at a breakeven point of around $86 per barrel for
Saudi oil. That's just one opinion, but it's a poignant one. So is the
royal family ready to give up its luxuries? Or will they sacrifice things
such as healthcare and education first? The fact that the government is
considering taking parts of Saudi Aramco public does not bode well.
The Iranian perspective, newly off sanctions, is entirely different.
It's probably more concerned about regaining the market share it lost
under sanctions than it is about low prices. In June, Iran will
launch a new grade of heavy crude that will compete with Basra crude,
and which the Iranians will surely seek to undercut in price in order to
win Asian market share from Iraq and the Saudis.
Libya and Iraq, the breakeven point is the point at which they can fund
the fight against Boko Haram, a civil war and the Islamic State,
respectively. Right now, they can't. And that's with per barrel production
costs of around $31/$32 in Nigeria, $23/$24 in Libya, and $10/$11 in Iraq.
Then we have Venezuela, where production costs hover just over $23
per barrel on average, but where disaster is imminent. Debt defaults here
are looming, and inflation is soaring, while recent moves to drastically
devalue the currency and
raise gas prices by over 6,000 percent for the first time in decades
are harbingers of highly destabilizing unrest. For Venezuela, the
breakeven point is particularly elusive because the country's oil is
very heavy and very dirty—and thus very expensive to extract and
Breaking the back of U.S. shale?
From the Saudi perspective, the end game here is to break the back of U.S.
The average production costs for the U.S. is about $36 per
barrel, but Rystad Energy estimates that some the key U.S. shale plays
have a $58-per-barrel breakeven point. This, too, varies section by
section, and even well by well, so it's hard to get a concrete picture.
Here is the breakeven picture in more detail, courtesy of Rystad
Plenty of shale areas are still profitable even with oil below
$30, according to Bloomberg Intelligence—just ask Texas, where the Eagle
Ford shale play's Dewitt County patch, for instance, can turn a profit
even with crude below $23. Other counties, though, might need $58 to be
It's all about hedging right now for U.S. shale
producers. The larger percentage of oil output that's protected by
hedging, the longer the lifeline.
Last week, Denbury Resources
DNR), for instance, said it had increased its fourth-quarter hedges to
cover 30 Mbbl/d at around $38/bbl.
So far, "there is little
evidence of production shut-ins for economic reasons," according to Wood
Mackenzie's vice president of investment research,
Robert Plummer. "Given the cost of restarting production, many
producers will continue to take the loss in the hope of a rebound in
The breakeven is quite simply the line in the sand that
determines whether extracting a barrel of oil is profitable or not. And
this line in the sand is vastly different for private American producers
than it is for kingdoms such as Saudi Arabia.
Everyone is hurting,
some more than others. Venezuela is already on its knees. But even $30 oil
isn't enough to bring the other bigger players down or to end the cold oil
war. Saudi Arabia has some
$600 billion in financial reserves; Russia is worried enough only to
start talking to OPEC; U.S. producers are holding strong and are fairly
calm, closely measuring the pace of desperation most recently indicated in
the word game over an output freeze.
The variables of the
breakeven game favor U.S. shale. But Saudi Arabia won't give up the cold
war path easily because its ultimate goal is to preserve its market share
at all costs.
Share this article with your facebook friends