A Look At The Break-Even Cost To Drill For Oil

albian oil sands

albian oil sands

The falling oil prices and unwavering OPEC have brought to the fore some of the challenges inherent in the oil drilling industry. The fall in oil prices has been linked to oversupply in the market and low demand. A number of U.S. oil companies have already hinted at plans to slow down capital expenditure this year to cut cost and possibly reduce capacity to allow prices to stabilize. However, their Middle East counterparts don’t look really worried about the falling oil price, which begs the question: why that is happening?

As already hinted earlier, an imbalance in the demand and supply of oil affects the prices. However, how a company drills its oil also determines how it should sell that commodity to make a profit out of it. If a company uses an expensive drilling method, it obviously needs to sell its oil at a higher cost to meet the expenses and earn a profit. The opposite is true.

Drilling methods

There are a number of different ways to drill oil whether a company is drilling in America, Middle East or Europe. Onshore, offshore and fracking are some of the available drilling methods for oil companies in the commercial business. The costs incurred in each drilling method are different.

Onshore drilling is the cheapest method to procure oil. Offshore drilling and extra oil from tar sands are the most expensive oil procurement methods. The reason U.S. and Canadian oil companies are in a tight spot currently is that they use the expensive methods predominately to drill their oil. On the other hand, their Middle East peers use the cheaper method and thusly have a much lower cost of production.

Break Even Points for Oil Drilling

Type Average Cost Per Barrel
OnShore Middle East $29
OffShore Shelf $43
Deepwater $53
OnShore Russia $54
Onshore Row $55
North American Shale $62
Oil Sands $74

The data comes courtesy of this cool chart by BusinessInsider Intelligence. While break-even points vary per project these represent averages. OPEC countries like Saudi Arabia have a much lower average cost then North American Shale or Oil Sands like in Canada.

Well-place Middle East producers

Therefore, it is easy to understand why OPEC is not worried over falling oil prices. Producers in Saudi Arabia and Qatar, for instance, can still sell their oil at the suppressed prices and make a profit or with little impact on their margins. Additionally, Middle East producers were able to make tens or hundreds of billions of dollars individually when oil prices were high.

Markets spooked by Oil 0n Monday

The U.S. benchmark price for oil touched  below $50 per barrel on Monday, and remains down almost 50% over the past six months.  The news spooked US Markets and sent the Dow Industrials down more than 300 points Monday, kicking off the new year on a sour note. Almost a quarter of the decline in the S&P was due to selling in the shares of Chevron Corp, Exxon Mobil Corp, and Caterpillar Inc.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.
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