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Goldman Analyst: Arctic Oil Too Expensive To Pursue

Arctic

Much cheaper, shorter-cycle and easier to pump U.S. shale has made Arctic oil exploration economically unjustifiable at the current oil prices, according to Goldman Sachs commodities equity expert Michele Della Vigna.

“Overall the idea that we have to go into the Arctic to find new resources I think has been dispelled by the enormous cheap, easier to produce and quicker time-to-market resources in the Permian onshore U.S.,” Della Vigna, commodity equity business unit leader in EMEA at Goldman Sachs, told CNBC on Thursday.

While some areas, especially those in the Russian Arctic waters, could be workable because they are closer to shore and easier to drill, areas such as Alaska cannot offer any economic advantages to explorers, Della Vigna noted.

“We think there is almost no rationale for Arctic exploration…Immensely complex, expensive projects like the Arctic we think can move too high on the cost curve to be economically doable,” the Goldman Sachs analyst said.

There is a new global “oil order” in which shorter and cheaper production cycles, driven by the U.S., are the winners, according to Della Vigna.

In the Arctic, Russia’s Gazprom Neft has recently launched production from two new wells at the first Russian Arctic oil project Prirazlomnoye, whose output this year is seen at around 19.06 million barrels.

Earlier this month, Norway’s government announced initial plans to open a record number of oil exploration blocks in the Barents Sea.

Related: Can Big Oil Survive A CO2 Crackdown?

But in its forecast for the global oil and gas exploration trends for 2017, Wood Mackenzie said in December that “high-cost frontiers, such as the ice-impacted offshore Arctic and extreme high pressure/high temperature plays, will be shunned.”

On the other hand, Rystad Energy said last month that the average wellhead breakeven price (BEP) for key U.S. shale plays has decreased since 2013 from $80 a barrel to $35 per barrel, or by more than 55 percent. The Permian Midland saw the largest decrease in terms of percentage, with the wellhead breakeven price falling by over 60 percent from $98 a barrel in 2013 to $38 per barrel in 2016, for horizontal wells only.

By Tsvetana Paraskova for Oilprice.com

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  • Naomi on March 24 2017 said:
    If Permian shale makes the same cost reductions in ten years it would have a similar $12 wellhead break even as Saudi oil. However the Saudi budget break even is $98/bbl because every Saudi citizen is on the payroll.

    OPEC socialist oil is not cost competitive with capitalist oil. Socialists must cut overhead, or pump more oil.

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