Warnings as crude price falls lower than production costs

THE cost of producing oil is threatening to overtake what it can be sold for.

Crude fell to a 12-year low last week – below $28 a barrel – amid fears for global growth, particularly in China, and as excess supply continues to flood the market.

Although it has since bounced back to about $32, some analysts are warning it could hit $10.

According to International Energy Agency, it costs Canadian Oil Sands $25 to $30 to produce one barrel. For offshore West Africa, the cost is up to $25, and for Kazakhstan it is up to $20 a barrel. Colin Smith, director of oil and gas research at broker Panmure Gordon, said: ‘It is likely an increasingly large portion of production is not covering its operating costs.’

The price of oil has collapsed from a 2014 recent peak of $115 a barrel.

In the North Sea, the latest survey from accountancy firm Moore Stephens revealed that the number of insolvencies of UK oil and gas service companies rose 55pc in the past year to 28, up from 18 in 2014. Also, the number of operational oil rigs in the North Sea has fallen to 27 from 57 and could fall as low as 19 by this summer, according to the Cromarty Firth Port Authority.

The cheapest production areas remain the Middle East and Saudi Arabia in particular. Peter Kiernan, lead energy analyst at The Economist Intelligence Unit, said: ‘The advantage Opec exporters in the Gulf have is they produce lower cost oil compared to elsewhere and can weather a sustained low oil price better than other producers.’