Oil firms set to keep pumping, but not investing

By Tom Bergin - Analysis

LONDON (Reuters) - Oil prices have a long way to fall before producers start to lose money and shut in fields but even prices around $50 can choke investment and lead to a supply crunch before the global economy recovers from recession.

Oil has dived from a record of almost $150 a barrel in July to around $50 now, but so far the only supply cuts have been output reductions from OPEC as it attempts to halt the slide.

Prices would have to drop much further before they fail to meet operating costs, and force wider shutdowns.

"For the bulk of production you can get down into the $20s or even the teens," said Mike Wittner of Societe Generale.

Even the most expensive crude, squeezed from Canada's bitumen-soaked oil sands, is profitable at current price levels, provided the field is up and running.

Marathon Oil's (MRO.N) operating costs in its Athabasca Oil Sands division are around $40-$45, Neil McMahon, oil analyst at Bernstein estimates, while Royal Dutch Shell's (RDSa.L) oil sands operating costs are only $36.

Oil sands account for around 1 million barrels of oil per day (bpd) compared to global output of about 86 million bpd.

With overall spare capacity of 2 million bpd and forecast to rise, the world could do without oil sands crude, in theory allowing prices to undercut that industry's operating costs.

Traditional crude production is much cheaper.

Canada's Talisman Energy (TLM.TO), which has fields in North America, the North Sea and Asia said its operating costs averaged $13.88 per barrel in the third quarter.

In Saudi Arabia, the United Arab Emirates and Kuwait, operating costs are as little as $1-$2, Ross Cassidy of industry consultants Wood Mackenzie said.

Even if prices drop below operating costs, for many producers it is a last resort to shut in output, Wittner said, citing the 1998 crash when crude fell below $10 a barrel, but producers were extremely reluctant to shut in fields.

"There is a real risk that when you start to shut in production, you can suffer permanent loss of recoverable reserves," Wittner said.

HIGH FIXED COSTS

Operating costs are a fraction of the total costs.