When global oil prices declined dramatically in 2014 and 2015, leading energy analysts expected that oil production in the United States—consisting primarily of “tight oil” extracted from rock formations by means of massive hydraulic fracturing—would likewise decrease due to relatively high production costs. Despite prospects for a negative return on investment, however, U.S. tight oil production continued almost unabated. Perplexed by this development, a team of researchers sought to better understand the relationship between oil prices and production volumes. In particular, they aimed to pinpoint those factors that determine the “breakeven” points of tight oil production projects—essentially the oil price points at which revenue from sales equals the cost of production.
Though energy industry analysts have widely used breakeven costs to predict how oil producers will respond to changing market conditions and to assess the economic viability of proposed oil and gas development projects, they have routinely defined them imprecisely and inconsistently. This has resulted in predictions of limited utility and reliability. To enable more robust predictions, the researchers, who work for Schlumberger-Doll Research, the MIT Joint Program on the Science and Policy of Global Change, the Atlantic Council, the King Abdullah Petroleum Studies and Research Center, and the Columbia University School of International and Public Affairs, have developed a systematic method to understand the costs of oil production and how they change with time and circumstances. Applying this method, they have proposed a set of standard definitions for breakeven points at different stages of the oil production cycle.
