York: The key supply/demand fundamental that keeps global oil prices above LTO break-even is the need for marginal global oil supply from developments, other than tight oil, requiring a break-even price above $90/bbl, which is higher than most U.S. tight oil opportunities. There also is the loss of volume from production interruptions (both planned and unplanned), which can move from region to region, but impacts supply on a regular basis. The "non-market dynamics" are factors such as market psychology that drives the price away from marginal cost of production economics. The best current example is the Ukraine crisis which can drive oil prices, either up or down, several dollars per day.
Rigzone: Wood Mackenzie contends that more than 70 percent of U.S. LTO reserves would remain economic at prices approaching $75/bbl. Looking at this in a historical context, how significant is 70 percent-plus at such a pricing level? Is 70 percent an extraordinarily high percentage, and how does the scenario change below $75/bbl?
York: It's difficult to make a comparison to history because it would require going back to what the industry thought break-even costs were for some other giant opportunity (e.g., Alaska, North Sea) and compare those historical break-evens and market prices (adjusted for inflation) to LTO. What can be said is that monthly oil prices have averaged more than $75/bbl for over 4 years and about 75 percent of the time since 2007, including the Financial Crisis. Anecdotally, the industry does talk about LTO with an enthusiasm I've only seen once or twice in my 20-plus years in the industry.This is a "keeper" for the archives.
There are so many story lines in this article. I will leave it at that for now.