What Is The Real Cost Of Oil? - Arhive

Asking what it costs to produce a barrel of oil is rather like asking how long is a piece of string? The answer can be anything you want between $1 and $500.

But of course the cost of producing oil in an ideal world should be well below the price of oil, leaving room for taxes and profits.

The global oil market sets the price and producers need to adjust and adapt their strategies to maintain costs below prevailing prices from time to time.

That is the theory at least.

With Brent trading at about $45, a cost analysis presented by Art Berman suggests that all Middle East OPEC and US shale producers are continuing to trade at a loss (see chart below the fold). Why then are there signs that the frackers are going back to work?

In the last Oil Production Vital Statistics post I said this:

The FT has reported that LTO from The Permian Basin can be produced for $35 to $40 / barrel and The Eagle Ford for $50.

Based on the following chart published in the FT.

Figure 1 A price view of new oil projects from Wood Mackenzie via the Financial Times.

The source is Wood Mackenzie, one would hope it was reliable. But when I sent it to Arthur Berman for comment he got back saying:

The Woodmac break-even prices are Drilling and Completion plus net OPEX. It is not an NPV number and does not account for royalty payments, G&A, interest expenses or income taxes. As a rough guide, add $15 to Woodmac’s numbers and that is what I get using those costs.

And he sent me his analysis based on Rystad Energy and the IMF amongst others. The difference is significant since at $45/bbl, the Wood Mac numbers suggest that frackers can turn a profit in the Permian basin (Mid-continent, Bone Spring and Wolfcamp) that would explain why the drillers and frackers are showing tentative signs of returning to work. While according to Art everyone is still deep in the red. What exactly is going on?