Oil production costs are rising, but shale projects remain profitable

The cost of developing new upstream oil projects continues to rise as inflationary pressure and supply chain issues persist. New research from Rystad Energy shows that the average breakeven cost of a non-OPEC oil project has risen to $47 per barrel of Brent crude, a 5% increase in the past year alone. Despite rising costs, breakevens are still lower than current oil prices.

Offshore deepwater and tight oil projects remain the most economical new sources of supply, with oil sands still the most expensive. By analyzing breakeven costs, we can estimate how much crude oil will be delivered in the future based on the economic viability of various sources of supply. The new research suggests that despite rising costs, there is likely to be more supply in 2030, driven mainly by production from OPEC countries, where costs are low and resource potential is high. The new equilibrium oil price for 105 million barrels per day of demand in 2030 is about $55 per barrel.

The research includes a detailed global supply cost analysis for the remaining liquid resources, divided into producing and non-producing fields. Fields not yet producing are divided into different supply segment groups. The report found that the onshore Middle East is the cheapest source of new production, with an average breakeven price of just $27 per barrel. This segment also boasts one of the most significant resource potentials. Offshore shelf is the next cheapest ($37 per barrel), followed by offshore deepwater ($43) and North American shale ($45). In contrast, oil sands production break-even averages $57 per barrel, but can go as high as about $75.

The increase in breakeven prices reflects increasing cost pressures on the upstream industry. This challenges the economic feasibility of new projects, but certain segments, including offshore and tight oil, continue to offer competitive costs, ensuring that supply can still be brought online to meet future demand. Managing these cost increases will be critical to sustaining long-term production growth.

Espen Erlingsen, Head of Upstream Research, Rystad Energy

Learn more with Rystad Energy’s Upstream solution.

From 2014 to 2020, tight oil and OPEC were the clear winners as both segments saw a reduction in break-even prices and an increase in potential volumes. Since 2020, potential supply from tight oil has been reduced, and we now expect tight oil to produce about 22 million bpd by 2030, including natural gas liquids (NGLs). The reduction in future oil supply is caused by the company’s change in strategy, with more money paid out to investors and amid industry consolidation.

Between 2014 and 2020, the offshore shelf and deepwater sectors saw a cost reduction of around 35%. However, the lack of new sanctioning activity during this period has reduced the potential offshore liquids supply for 2030. Compared to 2022, breakeven prices for the deepwater and offshore shelf segments are increasing due to higher unit prices. However, oil sands continues to experience a reduction due primarily to the lower operating costs seen for this heavy oil segment.

Beyond breakeven, new project average payback, internal rate of return (IRR) and carbon dioxide (CO2) intensity are vital parameters for evaluating new oil development economies. The payback time of the tight oil sector is only two years, assuming an average oil price of $70 per barrel, illustrating how quickly operators recoup their investments. The payback time is closer to 10 years or more for the other supply segments. Tight oil also leads in terms of IRR, with an estimated IRR of around 35% under the same average oil price scenario. In contrast, oil sands, the most expensive source of supply, has the lowest IRR of around 12%.

Over the past three years, the average CO2 intensity for tight oil has been 14 kilograms per barrel of oil equivalent (kg per boe), while deepwater has a slightly higher average CO2 intensity of 15 kg per boe. The oil sands sector again lags behind the other segments, with the highest estimated future emissions of around 70 kg per boe.

Of Rystad Energy

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