Last week I discussed the agreement struck at the extraordinary conference of the Organisation of Petroleum Exporting Countries (Opec) in Algiers, and noted there is no way prices are going to rise to pre-June 2014 and it is not in the interest of Opec to allow such a runaway market that will bring more unconventional supplies and repeat the boom-and-bust cycle.

I am encouraged to stick to this argument by a report wrote by IHS Global Inc., commissioned by the US Energy Information Administration (EIA), to investigate “Trends in US Oil and Natural Gas Upstream Costs”, which was issued in March 2016.

The report investigates in detail the cost of production wells in the major shale oilfields and offshore fields in the Gulf of Mexico. In its introduction, the EIA said: “The profitability of oil and gas development depends on both prices and the cost and productivity of newly developed wells” and that costs are “sensitive to increased efficiency in drilling and completion”.

The impact of the price decline since June 2014 is quite obvious on production. US tight oil has peaked in 2015 at about 4.6 million barrels a day (mbd) but expected to fall by more than 0.5-mbd in 2016 and by about 0.4-mbd in 2017, according to Opec’s “September Oil Market Report” and the report in question.

As for gas, the impact is less as production is slowing down but at a lesser pace. But the price impact is ameliorated by the decline in wells being drilled and completion costs and by productivity improvement. The report concludes that “average well drilling and completion costs in five onshore areas evaluated in 2015 were between 25 and 30 per cent below their level in 2012”.

Therefore, continued oversupply of world oil in 2016 is likely to drive cost further down due to the overall decline in drilling activity and the readily available rigs at lower rig rates. The average capital development cost per well in the fields considered fell between “$4.9 and $8.3 million including average completion costs that generally fell in the range of $2.9 (million) to $5.6 million per well”.

Further efficiency gains are expected to reduce costs, with drilling rates and lateral (horizontal) lengths increasing and multi-well pads being used in addition to improved drilling sands and chemicals. Therefore, a well today is not like that of 2012 and costs are trending higher because of these improvements. These are driving the overall investment of a dollar per barrel lower.

Unfortunately the report does not give numbers as to this cost per barrel, but the message is clear and the cost curve for shale oil and gas has moved lower.

Offshore field developments are a longer term affair and therefore less impacted by the price in the last two years. But they would be if prices persist to be weak. Offshore oil production in the Gulf of Mexico — where “there are fewer than 100 deepwater wells” — is still increasing but at slower rate and new developments are postponed.

“Deepwater development generally occurs in the form of expensive, high-risk, long-duration projects that are less sensitive to short-term fluctuations in oil prices,” the report says.

However, “modelling of current deepwater Gulf of Mexico projects, full cycle economics result in break even prices that are typically higher than $60 a barrel”. But efficiencies are improving and negotiations with services and materials suppliers are going on to reduce costs.

IHS “forecasts a 15 per cent reduction in deepwater costs in 2015, with a 3 per cent per annum cost growth from 2016 to 2020”.

As for “unsanctioned” projects, it is estimated that an approximate 20 per cent reduction in capital expenditure is needed to get these projects in the Gulf of Mexico to a $60 a barrel break even price. And a further 30 per cent cut is needed to arrive at a $40 a barrel break even, a very difficult task in both cases.

However, just like the case in shale oilfields, new technology and efficiency improvements are expected in deepwater fields as well.

It is my humble deduction that if over $60 a barrel is the break even price for offshore deepwater fields, then it must be lower for onshore fields in the shale oil plays.

There is indeed a lot to learn from the EIA/IHS report as it embeds a warning that if Opec producers are concerned about their market share, then it is imperative that they should not allow runaway prices that will bring back all the high cost projects into play.

The second point to learn is for national oil companies to conduct a similar exercise to find out where they are with respect to new trends in costs.