Oil Costs Equation

In the Persian Gulf region where most OPEC nations are located, oil is produced at very low costs because the oil fields in this region can have primary production. Oil production costs have varied between $7 and $12 a barrel in the Persian Gulf over the past decade, far lower than $30-40 a barrel in some other areas.

Estimates show that oil extraction and production in key OPEC member states would continue to be much less expensive than that of  non-OPEC producers like the US, Russia, Canada, Brazil and Britain.

The main reason for difference in oil production costs in various nations results from the difference in nature of oil fields and methods of production.

Production from an oil field would impose costs on at least two sectors. The first one covers capital expenditures (CAPEX) including primary measures for identification of a field like exploration and seismic testing, drilling, development and operation. The second one covers operational expenditures (OPEX) which would integrate all costs affecting production. Some of them are staff salary and maintenance costs.

Crude oil transportation to destination imposes extra costs. Given the distance from the starting point to destination and the safety of route, oil production cost per barrel would go up. Production costs would be much higher for deeper and offshore fields.

OPEC, Non-OPEC Production Costs

Britain is currently enduring the highest costs in oil production in the world, reaching $44.33 a barrel. Due to tough access to the North Sea, oil extraction costs are high there. It is followed by Brazil ($34.99) and Canada ($26.64). In the US, shale oil production costs $23.35 per barrel, while that of conventional oil is $20.99. Russia spends $19.21 for each barrel of oil to be produced, while the figure for Norway is $21.31.

Among OPEC nations, Nigeria in terms of cost per barrel comes first by spending $28.99 per barrel, followed by Venezuela ($27.62) and Indonesia ($19.71). Middle East nations pay much less: Saudi Arabia ($8.98), Iran ($9.08) and Iraq ($10.57).

The reason for low costs in Saudi Arabia is that its crude oil reserves are not located in high depth. The size of its fields also make oil extraction economical. Iraq generally pays small sums for each barrel, but there are some mature fields in this country to require higher costs for oil recovery.

Taking into account the low costs of oil production in Iraq, Iran and Saudi Arabia – all top OPEC MCs – it can be argued that the Organization of the Petroleum Exporting Countries is influential on oil markets. At the end of 2019, OPEC member countries held about 79.1 % of the world proven oil reserves.

Threshold

In economics, when production costs exceed the cost price of a commodity in the market, production would be expected to go on a downward trend in order to help balance supply and demand. However, this issue would face specific challenges in the oil market, as many nations rely on oil for the bulk of their budget and revenue. Depriving them of this source of income would create economic and even political challenges. Technically speaking, the possibility of reducing the production from an oil resource would be challenging and is likely to damage existing industries or cause problems for future recovery. Therefore, global energy markets cannot simply follow all economic rules.

Meantime, high oil production costs while prices are low would mean low profits and in some cases would mean losses for producers. In case it results in a halt in oil production, more economic consequences like weakened global economic growth would follow, particularly because decrepit installations in some countries would increase production costs in the future. Therefore, if proper investment is not made in the petroleum industry of some nations, the world will be faced with oil production fall. Of course in recent years, shale oil production costs have declined significantly. Production cost of shale oil is normally higher than that of conventional oil; however, technological progress over recent years has narrowed down these two rates.

In any case, the most economical oil production still belongs to Persian Gulf states, which can even tolerate oil prices falling to $10, a threshold which would lead to the shutdown of oil industry in many other nations.

Courtesy of Iran Petroleum

by 

Shuaib Bahman