Average full-cycle costs at the major European oil companies fell by 13% last year, according to Fitch Ratings’ analysis. All-in upstream costs remain well above current oil and gas price, but the integrated business model of these firms make them more resilient to low crude prices.

They saw a less steep decline in earnings compared to upstream-focused producers, which may need to cut capex more aggressively to the detriment of long-term production prospects.

Average full-cycle costs, which are equivalent to the level of realised oil and gas prices needed to break even in the long-term, dropped to USD62/barrel of oil equivalent (boe) in 2015 from USD71/boe in 2014, based on the results of BP, Shell, Total and Eni. Adjusting these figures to take account of the difference between the average realised price and the average Brent price, we estimate that European oil majors’ upstream divisions needed a Brent price of USD90/barrel (bbl) to break even in 2015.

Excluding North American operations, where a drop in reserves has had a big impact on finding, development and acquisition costs for BP and Shell, the average Brent break-even price was around USD73/bbl. This figure is still well above market prices, supporting our view that current prices are unsustainable in the long term. Prices significantly below the long-term breakeven level should result in lower investment and lower production over time, which should push prices upwards.

Operating cash costs, which includes the production costs reported by companies and an assumed USD3/boe of selling, general and administrative expense, dropped 19% to USD18/boe in 2015. This corresponds to a Brent price of USD26/bbl and means that companies’ upstream divisions continue to generate positive operating cash flows. We believe a Brent price below USD30/bbl, which was tested early this year, would not be sustainable even in the short term as it would result in production being halted at marginal fields with higher operating costs.
Source: Fitch Ratings