Nearly 3% of output is vulnerable if oil prices fall to $80, says IEA

 An oil refinery is seen at sunrise in Denver. Brent crude fell almost 3% to a fresh low yesterday, trading at its weakest level since 2010.

Reuters/London

Nearly 3% of global oil production is vulnerable to cuts if prices fall to $80 per barrel, making some projects in Canada, Angola, Brazil and Norway unprofitable, the International Energy Agency (IEA) said.

The estimate was included in a monthly report in which the IEA also cut its forecasts for oil demand and said prices may drop further.

A tumble in the price from the year’s high above $115 per barrel to below $90 has focused investors and oil companies once again on the breakeven level - the point at which net return on a project turns positive.

“All told, roughly 2.6mn bpd of world crude oil production comes from projects with a breakeven price in excess of $80 per barrel,” the report said yesterday.

This represents 2.8% of the 93.2mn bpd of production in the third quarter of 2014.

Some Canadian production has among the highest breakeven rates, the IEA said.

“Canadian synthetics (oil sands) projects have the highest percentage of production of the types examined here (about 25%) that would fall into a negative net present value if there were to be an extended period of prices below that level,” the report said.

Projects with high breakeven rates are scattered around the world, however. “Places as diverse as onshore China, offshore shallow-water Malaysia, Nigeria, conventional onshore US, shallow-water UK and onshore conventional Russia have significant amounts of high breakeven production,” the report said.

It noted that some planned, high-cost projects had already been cancelled.

In the US, slightly more than 4% of shale oil production requires a breakeven price of more than $80 per barrel, the IEA said.

A large proportion of deep water exploration operations have high breakeven rates, the report noted, though the picture is mixed.

“Some 8% of deep water crude oil production is adjudged to require a breakeven of $80 per barrel or higher ... totalling some 1.05mn bpd or 1.1% of liquid production,” the report said.

Meanwhile the Opec is unlikely to call an emergency meeting as proposed by Venezuela, two Opec sources said yesterday, a sign the exporter group is in no rush to discuss a collective response to the sharp drop in oil prices.

Venezuela last week became the first member of the Organisation of the Petroleum Exporting Countries to call for an emergency meeting to arrest the slide in oil prices, which have slid to below $88 a barrel, the lowest since 2010.

But the suggestion has met with a cool response from others in Opec, which appears split on what action if any should be taken to halt the slide. The next scheduled Opec meeting is on November 27 at Opec’s Vienna headquarters.

“The ordinary meeting is not very far away,” said an Opec delegate, who declined to be identified by name. “It would be surprising to meet before.”

While the drop in prices has caused concern in some Opec countries, the chance of collective action looks unlikely. Kuwait said on Sunday Opec was unlikely to cut production, while Saudi Arabia told Opec that it raised output in September.

Indeed, Saudi Arabia has been telling oil market participants that it is comfortable with lower prices, a policy shift that may be aimed at retaining market share in years to come, Reuters reported on Monday.

Another Opec source downplayed the chance of an emergency meeting taking place.

“No preparations are being made. It seems to have almost died away,” the source said.

The first delegate added that winter demand should support the oil market in coming months and appreciation of the US dollar had partly offset the impact of lower oil prices for some producers.

“At this time of the year, it is normal to have some price weakness,” the delegate said.