You won’t believe what the cost of producing Saudi Arabia’s oil is
When crude oil prices slumped into the $ 20 range early last year, most oil-producing countries trembled in their boots. This is because few countries can make a lot of money – if any – at this price. I say more because there are a handful of producers who were still able to make a nice profit at this price. Saudi Arabia was in the lead.
According to data from energy industry consultant Rystad Energy, it cost Saudi Arabia on average less than $ 9 to produce a barrel of oil last year. It’s the cheapest in the world, although the other OPEC countries Iran and Iraq can also produce for around $ 10 a barrel, which is much lower than rival countries:
Here’s a look at why Saudi oil is so cheap and what an emerging rival is doing to catch up.
Explore what makes Saudi oil so cheap
Rystad Energy examines four data points to determine a country’s average cash cost to produce a barrel of oil: capital outlays, production costs, administrative and transportation costs, and gross taxes. Here’s a breakdown of those costs per barrel for Saudi Arabia:
As this graph shows, Saudi Arabia only needs to spend $ 3.50 on capital to extract a barrel of oil from the ground. This amount includes the sums invested in the drilling of new wells as well as the associated equipment. The reason its capital costs are so low is that the country’s oil is located near the surface of the desert and pooled in large fields, so it doesn’t need to invest so much to get it out of the desert. ground. Compare that with countries that have large offshore production bases like Norway and the UK, which incur significantly higher capital costs of $ 13.76 and $ 22.67, respectively, due to the need to build large offshore production platforms.
Meanwhile, the location and size of Saudi Arabia’s oil fields also helps keep its production costs low. While not the cheapest in the world, as several countries have production costs of around $ 2 a barrel, it is still a fraction of the production costs of a country like Canada, which pays $ 11.56. to produce a barrel of oil. One of the reasons why Canada’s production cost is so high is that the oil sands make up the bulk of its production, which are either produced by a process that burns natural gas to produce steam or with large excavators and mining trucks to extract the tar sands from the ground. .
As a percentage, Saudi Arabia has some of the highest administrative and transportation costs in the world at 27.7% of the total. However, that’s just because his other expenses are so low. When you look at those costs per barrel, they are at the bottom.
Finally, the absence of taxes is an important competitive advantage for Saudi Arabia and other very low-cost producers like Iran and Iraq. Looking ahead, if Russia didn’t have to pay taxes, its cash costs for oil would drop from $ 19.21 to $ 10.77, which is much more competitive with its rivals in the Middle East. That said, while these Middle Eastern countries don’t tax oil production, they still get their share because oil profits support a large percentage of their federal budgets. In fact, oil provided 62% of Saudi government revenue last year and is expected to provide 69% in 2017 due to rising oil prices.
How does shale compare?
For years Saudi Arabia has been the undisputed world leader in the oil market. However, thanks to advances in shale drilling technology, oil production in the United States recovered after years of decline, and at one point America overtook Saudi Arabia as the top global producer. In fact, shale drillers pumped out so much oil that the world ran into huge surpluses, causing prices to plummet. The Saudis didn’t help matters, choosing to leverage their low costs in higher volumes to drive as many shale producers out of the market as possible.
This decision backfired, however, as it forced shale producers to become much more efficient, resulting in significant cost reductions. That said, U.S. shale’s cash costs are still more than double that of Saudi Arabia due to higher spending across the board:
Yet these costs have steadily declined over the years, with capital spending improving the most. For example, last year, the oil production of the main shale producer EOG Resources (NYSE: EOG) decreased by less than 1% despite a remarkable 42% reduction in capital expenditure from 2015. This capital efficiency was fueled by a significant decrease in the costs of EOG’s completed wells after spending on drilling in the Bakken fell from $ 8.8 million in 2014 to $ 5.1 million last year, while those in the Delaware Basin fell from $ 15.4 million to just $ 8.5 million in during the same period. EOG used several techniques to reduce costs, including using data to make well placement decisions, drilling longer wells and using more sand, and other innovations.
Likewise, production expenses have fallen sharply. In the case of EOG Resources, its cost per barrel of oil equivalent has fallen 22% since 2014. Meanwhile, production spending in the Permian Basin has fallen to $ 2.25 a barrel, according to Pioneer of natural resources (NYSE: PXD). For this reason Scott Sheffield, now retired CEO of Pioneer Natural Resources, said last year that “we can certainly compete with anything Saudi Arabia has.” That said, not all pools are this good, including old shining stars like Eagle Ford and Bakken. However, shale is still in its infancy and has come a long way over the past decade, suggesting that companies may continue to innovate to further reduce costs.
Takeaway for investors
Saudi Arabia has the lowest oil production costs in the world thanks to two strategic advantages: Abundant oil deposits near the surface and no production tax. For this reason, he can make money in almost any oil price environment. Having said that, Saudi Arabia made a mistake in trying to use its low costs to kill the shale revolution; this only strengthened the shale.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.