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Growth Potential for Tight Oil

Breakeven prices are similar, but tight oil has the largest growth potential.
This article appeared in Vol. 15, No. 4 - 2018

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Improved Oil Prices

Average breakeven prices and potential 2025 liquid supply for different offshore and tight oil regions. *Excludes projects in West Africa. Source: Rystad Energy UCube, August 2018. With the recovery in oil prices and improved free cash flow for E&P companies, Rystad Energy sees a new investment cycle on the horizon. As oil companies start to increase activity again, the question becomes clear: which source of supply will attract most investments and have the strongest production growth? 

The chart shows the average breakeven price for new projects and the total potential liquids production in 2025 for projects for offshore and tight oil that have yet to be sanctioned.

Wolfcamp in the Permian Delaware is the supply source that has the largest production coming from not-yet-sanctioned projects. Rystad Energy foresees that this formation could add 3.5 MMbpd in 2025 from wells not yet drilled. Offshore Mexico is the source with the lowest breakeven price at an average of ~US$35 per barrel. The projects yet to be sanctioned could add about 0.5 MMbpd by 2025.

Potential for Tight Oil

Offshore projects in China and South East Asia have, on average, higher breakevens than other offshore regions. Two reasons for this are the tough fiscal regimes in this region, and the fact that the undeveloped discoveries are small. From the chart we can see that the breakeven prices for tight oil and offshore projects are in the same ball park, at ~US$40–50 per barrel. However, we can observe that in terms of production, tight oil has the largest potential. Wolfcamp in Delaware has more than twice the production potential from not-yet-sanctioned projects in comparison to offshore OPEC.

Another reason for E&P companies to prefer tight oil compared to offshore is the short payback time. Normally, a company can recover its tight oil investments in two to three years, but for investments in new offshore projects the payback time is much longer, normally seven to ten years.

Competitive Resources

The combination of large growth potential and short payback time has made tight oil a very competitive source of new production. Rystad Energy expects tight oil investments to grow at a yearly rate of ~20% over the next few years. With this growth rate, total investments in tight oil are expected to be at almost the same level as offshore investments in 2019.

This Regional Update is brought to you by Rystad Energy.

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