The cost of developing new upstream oil projects is continuing to rise as inflationary pressure and supply chain woes endure. New research from Rystad Energy shows that the average breakeven cost of a non-OPEC oil project grew to $47 per barrel of Brent crude, a 5% increase in the last year alone. Despite rising costs, breakevens are still less than current oil prices.

Offshore deepwater and tight oil projects remain the most economical new supply sources, with oil sands still the most expensive. By analyzing breakeven costs, we can estimate how much crude oil will be delivered in the future based on the economic viability of different supply sources. The new research suggests that despite rising costs, more supply is likely in 2030, driven mainly by production from OPEC countries, where costs are low, and the resource potential is high. The new equilibrium oil price for 105 million barrels per day of demand in 2030 is around $55 per barrel.

The research includes a detailed global cost-of-supply analysis for remaining liquids resources, split into producing and not-yet-producing fields. The not-yet-producing fields are further divided into different supply segment groups. The report found that onshore Middle East is the cheapest source of new production, with an average breakeven price of just $27 per barrel. This segment also boasts one of the most significant resource potentials. Offshore shelf is the next cheapest ($37 per barrel), followed by offshore deepwater ($43) and North American shale ($45). Conversely, oil sands production breakevens average $57 per barrel, but can go as high as about $75.

"Rising breakeven prices reflect the increasing cost pressures on the upstream industry. This challenges the economic feasibility of some new projects, but certain segments, including offshore and tight oil, continue to offer competitive costs, ensuring supply can still be brought online to meet future demand. Managing these cost increases will be critical to sustaining long-term production growth,” says Espen Erlingsen, Head of Upstream Research at Rystad Energy.

From 2014 to 2020, tight oil and OPEC were the clear winners, as both segments saw a reduction in the breakeven price and an increase in potential volumes. Since 2020, the potential supply from tight oil has been reduced, and we now expect tight oil to produce around 22 million bpd by 2030, including natural gas liquids (NGL). The reduction in future tight oil supply is caused by the change in company strategy, with more cash paid out to investors and amid industry consolidation.

Between 2014 and 2020, the offshore shelf and deepwater sectors experienced a cost reduction of around 35%. However, the lack of new sanctioning activity over the period reduced the potential 2030 offshore liquids supply. Compared to 2022, breakeven prices for the deepwater and offshore shelf segments are rising due to higher unit prices. Oil sands, however, continue to see a reduction due primarily to the lower observed operational costs for this heavy oil segment.

Beyond breakevens, average payback for new projects, internal rate of return (IRR) and carbon dioxide (CO2) intensity are vital metrics for evaluating new oil development economics. The tight oil sector’s payback time is just two years, assuming an average oil price of $70 per barrel, illustrating how quickly operators are recovering their investments. Payback time is closer to 10 years or more for the other supply segments. Tight oil also leads the pack in terms of IRR, with an estimated IRR of around 35% in the same average oil price scenario. Conversely, oil sands, the most expensive supply source, has the lowest IRR of approximately 12%.

Over the last three years, the average CO2 intensity for tight oil has been 14 kilograms per barrel of oil equivalent (kg per boe), while deepwater has a slightly higher average CO2 intensity of 15 kg per boe. The oil sands sector again falls behind the other segments, with the highest future estimated emissions at around 70 kg per boe.