Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

During the bull market in oil, it became fashionable to say something like "$100 is the new $20." These days, it's more common to hear "something less than $100 is the new $100."

Wood Mackenzie made its own contribution to the conversation with a new study released on Wednesday. The energy consultancy expects most of the oil projects currently planned over the next decade to be economic at oil prices of $60 a barrel or less. The bulk of those barrels are projected to come from shale deposits in the U.S., where costs have fallen rapidly in recent years. Here's the relevant slide from Wood MacKenzie's report ("Pre-FID" means projects yet to be approved with a final investment decision):


Much of the excitement about this is, of course, focused on the left-hand side of that chart dominated by U.S. shale plays ("L48" means the lower 48 states). 

It's worth casting your eyes over the right-hand side, too, though. That's where conventional oil fields beneath the waves tend to reside; generally higher-cost reserves ranging up to $100-a-barrel or more in terms of cost. They matter for two big reasons.

First, if Wood Mackenzie's demand projections are right, then we need those barrels. Although 9 million barrels a day of new production by 2025 is expected to come in at a breakeven price of $60 or less per barrel, Wood Mackenzie reckons more than 20 million a day is required. So while productivity gains in U.S. shale fields help to bring down the cost curve overall, prices will have to rise at some point to encourage deepwater drillers to do their thing.

The second observation requires you to look at the chart again. Those bars on the right-hand side do reach high in terms of prices, but they also reach quite low, too. So the weighted average breakeven prices top out at $80 a barrel. That looks high compared to today's market price in the mid-$40s, but actually looks lower than where breakevens were being estimated just a few years ago. This raises the possibility that a recovery to triple-digit oil prices remains elusive over the next decade.

The key issue is what has lowered those costs in offshore drilling. Patrick Gibson, Wood Mackenzie's director of global oil supply research, puts some of the drop down to cyclical factors such as squeezing oil services contractors' fees. However, a bigger factor as been high-grading, whereby operators focus in on the sweetest (or lowest-cost) spot in a particular field. In other words, the breakeven prices drop, but so does the size of the overall resources available, as less-attractive development projects simply disappear from consideration. Whereas conventional, pre-final-investment-decision projects ran to an estimated 8 million barrels a day in 2014, this has come down to 5 million a day, according to Gibson.

Oil bulls discouraged by the depressing effect of cheaper shale barrels can take this as a silver lining. It suggests that, while cost reductions in the U.S. look structural, there's a decent chance they aren't elsewhere -- and this will push prices back up as the call on more expensive barrels from beneath the sea rises over time.

One caveat: The oil industry knows it has to work harder to prevent costs spiraling out of control as they did in the decade up to 2014. And recent mergers among services giants such as Schlumberger and Technip point the way to achieving that.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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