Paper short abstract:

Low oil prices reflect surge in unconventional US tight oil and low-cost MiddleEast oil. Marginal barrels are no longer from ‘top of merit-order’ reservoirs but from low&middle-cost producers. Oil majors are negatively impacted. Contracts will have to mitigate decline in non-ME developing-country producers

Paper long abstract:

Implications of lower oil prices gain to be analyzed in light of their deeper origin, i.e. the emergence of new production capacity in low-cost producers (Iran, Iraq and, to counter them, Saudi Arabia) and in unconventional US tight oil plays. In 2004-2014, the marginal barrel was a 'tough-oil' barrel mostly from developing countries or FSU. For one decade at least, it will be from the Middle East (ME) or, if not, from North America (NA). Non-ME developing producer countries (NMEDCP) will be confronted with reduced interest in their top-of merit-order cost-curve resources. Similarly, oil majors (IOCs) will find their frontier-technology competitive advantage of reduced value vs. National (NOCs) and independent US producers. IOC generation of, and access to capital will be reduced accordingly, shrinking their capacity to contract.

In this context, NMEDCP will see the period when new oil counts as 'production oil' extended and 'profit oil' delayed. Their bargaining power will be reduced, the more so as the 'disinvest' movement will gain strength, leading shareholders to discount reserves that take time and capital to develop in favor of shorter life-cycle unconventional oil for which the notion of 'reserves' makes less sense. Policies and contracts will have to either postpone developments and make it conditional to carbon capture, or develop forms of resource-holder-IOC partnership beyond today's tool box and at the cost of significant cultural adjustment.