BP, Shell, Prepare For Substantial Crude Price Drops

Shell's says its deepwater projects must break even at $40 per barrel or less. File Image / Pixabay

Even though crude is currently hovering at the $75 per barrel level, at least one energy production major is preparing for a substantial price drop later this year - and another is setting a break even cost for deepwater projects atminimum $40, in order to be resilient to any adverse market conditions.

Brian Gilvary, chief financial officer for BP, said on Tuesday that U.S. shale production surging by up to 1.5 million barrels per day (bpd) will cause prices to weaken in the second half of 2018.

He remarked, "We're still planning for $50-$60 a barrel, that's a good place to sit."

He went on to state that, "What we're seeing now is strong demand, OPEC compliance, you're seeing geopolitics playing to the front end of the market.

"That will start to get dampened as you see Lower 48 [U.S. states] production ramp up; you will see at least 1 million to 1.5 million barrels per day coming out of the Lower 48 this year."

Royal Dutch Shell Plc is also taking a cautionary approach when contemplating upcoming operations: in this case, Harry Brekelmans, project and technology director for the company, said that deepwater projects need to break even at $40 and preferably lower: "You've got to think about that $35-$40 range, it's something we want to be very disciplined around because it gives you reassurance that going forward, your portfolio is resilient."

The remarks come in the wake of Shell last week unveiling its Vito project in the Gulf of Mexico, which will produce 100,000 barrels of oil equivalent per day at its peak ,at a cost of less than $35 per barrel (reportedly, simplifying the design and buying standardized rather than bespoke equipment enabled Shell to bring operational costs of Vito down by 70 percent since the project was first unveiled in 2014).

Brekelmans pointed out that $40 break even is almost half the cost of some projects commissioned before the 2014 oil-price crash.

Apparently neither Gilvary nor Brekelmans was overly influenced by remarks from Pierre Andurant, founder of Andurant Capital Management earlier this week: Andurant said in a series of tweets that a lack of investment in projects with long lead times (supposedly due to the impact of electric vehicles) could result in $300 per barrel oil within a few years.