"What Happens if E&P Costs Continue to Rise, and Oil Prices Don't?"

From late 2011, my presentations posed this question, as supply-constrained analysis (the methodology we use) suggested this was the most likely outcome.

Oil Majors FCF (Sept. 2014).png

Major Oil Companies’ Free Cash Flow

Source: Astenbeck Capital Management

Three years later, we know the answer: The oil majors’ free cash flow plummets.  And this applies not only the likes of Statoil and Shell, but also to the wider set of non-OPEC conventional producers, for example, Sinopec and PetroChina.  The operators are taking steps to correct the situation, involving both a reduction in capex and a brisk pace of divestments.  Their efforts will eventually turn the situation around. 

On the other hand, unless capital efficiency improves dramatically, conventional non-OPEC oil production is likely to take a substantial hit, considerably more than most observers expect.