Chile, blessed with the globe’s most prodigious endowments of copper, readily packaged in massive and easily mined ore bodies. This was a real boon to the world economy, especially helping China sustain its red-hot catch-up growth in recent decades. The combination kept this essential metal at a (very low) average real price of $3,250 per ton between 1983 and 2003. This was only possible, insists Gait, as foreign investment started to pour into Chile from the 1980s, allowing the coun- try to raise its output to 3,700 kilotons per year during those same years. “No other location will present as much in the way of ‘low-hanging fruit’ as was on offer during the development of Chile’s copper industry,” noted Gait in one of the volumi- nous reports his three- person London shop churns out. More recently though, the picture dark- ened as Chile’s produc- tion stagnated, plagued by declining ore grades. “The future is going to be far harder than the history of the last few decades might suggest,” he wrote. Gait dismisses Peru as “Chile lite” at best, and notes that since 2003, the largest supply growth has come from China, which has about 8% of Chile’s endowment. World-class discoveries are getting harder—and increasingly seemingly im- possible—to come by. In fact, the rate of new cop- per deposit discoveries is at an all-time low—not since the early days of the industry in the 1900s. Mongolia’s huge Turquoise Hill mine (locally known as Oyu Tolgoi, also discovered by Ivan- hoe Mines) in the Gobi Desert was one of the last places on Earth not sys- temically explored by modern explo- ration techniques. There is also an insidious dynamic inherent to mining, which Gait noted is “always moving away from quality” by exploiting the best deposits first— those with the highest grade, softest rock, and “lowest stripping ratio”— thereby always creating “its own scar- city.” As the geological base deterio- rates, it’s increasingly difficult for
OIL INDUSTRY’S GREAT
Just two years ago, $100-a-barrel oil seemed to
be the new normal, but a recent recalibration of
the industry’s cost structure may mean that such
elevated prices are years off, if not altogether
aberrational, barring a genuine international crisis.
In the past two years industry has cut costs by about a third, according to a recent report by
IHS Markit, and with supply and demand in rough balance, it expects the global oil benchmark
price to remain at $50 to $60 a barrel, at least into 2018 when an oversupply is forecasted.
The industry’s cost cutting was a survival response to its deepest downturn since the 1990s;
oil was under $30 by early 2016. “We estimate that the full-cycle cost of a ‘representative’ new
oil project fell by a production-weighted average of about 34% between 2014 and 2016,” said the
report, citing improvements in how companies design, build, and operate new projects—and by
greenlighting only the most economic projects in their portfolios. The efficiencies registered
across the industry, yielding new break-even prices: under $15 a barrel for Middle East onshore,
$40 for global deep water and U.S. tight oil, $45 for Russian onshore, and $50 a barrel for Canadian oil sands—all assuming a 10% internal rate of return.
The big question now facing the industry is how sustainable these new break-even prices will
be in the face of rising demand and increased production. Recent efficiency gains mean U.S.
shale oil wells can now be drilled for $7 million, half what they cost two years ago, and some
operators’ break-even price is now below $40 a barrel.
That seems likely to sustain the surge of U.S. production, which was the biggest trigger of
the price collapse at the end of 2014. That year supply grew two-and-a-half times faster than
demand, and approximately 60% of this— 1. 4 million barrels a day—came from U.S. shale oil
Pushing back against this are the production cutbacks orchestrated by OPEC, which accounts
for a diminishing but still significant share—40%—of the world’s supply. Roughly 1. 8 million barrels
have been held off the global market since November, and these were recently extended through
The industry’s two key dynamics today—cartel restrictions vs. continuous efficiencies—are
now in an unfolding “great struggle,” according to industry guru Daniel Yergin, author of seminal
oil industry books. “Rebalancing is now colliding with the other force—recalibration of costs to a
lower level of oil prices,” he noted in a May op-ed in the Wall Street Journal. “This massive adjust-
ment is reshaping the way the global oil industry works.”
Undoubtedly, some savings simply come as the downturn cools production activity and costs,
when suppliers lose price-setting leverage and instead become price takers. That balance is
bound to tilt back toward suppliers as drilling revives, especially in hot spots like the Permian
Basin in West Texas and New Mexico, which is on its way to becoming the world’s second-
largest oil field (in recovery)—and where costs are expected to rise 15% to 20% this year. —K.S.