Vol. 13, No. 17 Week of April 27, 2008
Providing coverage of Alaska and northern Canada's oil and gas industry

Study tackles gas costs

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Cost of delivery from far north to NA ‘very high,’ must be compared to LNG

Gary Park

For Petroleum News

Natural gas prices are readily accessible at North America’s trading centers, notably Henry Hub, AECO, Dawn, WAHA and Opal.

But the full-cycle costs covering exploration, drilling, completion and production are not available.

To bridge that gap, Calgary-based consultant Ziff Energy Group has released a trail-blazing study that analyzes the total costs from 20 major North American gas areas (some of them divided into sub-basins), including Alaska and the Mackenzie Delta, whose costs including transportation tolls have been included in the study even though they are years away from production.

Two months ago, Ziff released a report examining Arctic gas developments and their impact on the continental supply outlook over the next decade.

It said at the time that given the increasing demand for gas and declining conventional supplies gas from Alaska and the Mackenzie Delta “will be required to balance markets and supply.”

Frontier costs comparable to LNG

Ziff senior associate Dave Vetsch said the cost of delivering incremental supply from northern frontier regions is “very high and must be compared with the cost of delivering liquefied natural gas to North America.”

The latest research covers about 90 percent of all gas produced in North America.

Ziff is not making its detailed estimates publicly available, but has offered some wide-range conclusions.

For instance, the Western Canada Sedimentary basin — by far North America’s largest producing region at 16.6 billion cubic feet per day — earns a bleak ranking.

Five of the basin’s six plays are listed among the least economic on the continent, creating what Ziff Chief Executive Officer Paul Ziff concedes will be a controversial finding.

He said “another energy consulting firm that conducted a continental analysis last year found that all Canadian plays ranked economically in the most attractive half among North American plays, and the Canadian Foothills gas play was the lowest cost of the Canadian plays.”

But the Ziff study concluded that the Canadian Foothills “ranks dead last” of the 24 gas supply sources.

Industry moves support estimate

Ziff said that estimate is supported by industry moves which have seen Marathon, Anadarko and Samson selling off their Canadian assets, while leading Canadian producers, such as EnCana, Talisman Energy and Petro-Canada along with a number of trusts, “have invested in U.S. gas plays in the last five years.”

The Western Canada Sedimentary basin is divided into six areas: Deep, Foothills, tight gas, conventional medium depth, shallow and coalbed methane.

For tight gas in the Green River basin in the U.S. Rockies, the costs details cover Jonah, Pinedale, Washakie, Sandwash, Mesaverde, Wamsutter, Frontier and Moxa Arch plays.

In a news release, the firm said:

• Operating cost estimates represent actual field operating expenses to the point of gas sale.

• Royalties vary, but typically range from 12.5 percent to 20 percent.

• Production taxes (especially in the U.S.) typically range from 4 percent to 15 percent.

• Finding and development costs cover drilling, facilities, land and seismic.

• The target rate of return on invested capital varies among producers, but the study has used a 15 percent (before income tax) rate.

For competitive analysis, the report includes cost scenarios for the Middle East, Pacific Basin and Atlantic Basin LNG supplies delivered to North American shores.

The report also provides a cross comparison of similar gas strategies, comparing tight gas for Greater Green River, Uinta-Piceance, East Texas-North Louisiana, South Texas, Western Canada and Arkoma; for coalbed methane there are comparisons of Powder River, San Juan, Raton and Alberta’s Horseshoe Canyon; and shale gas embraces Barnett, Woodford and Fayetteville.

For some U.S. plays, the report provides four to 12 individual results in each area, rather than just a single average cost.

Simon Mauger, Ziff’s project director, believes the study will help producers prioritize “which gas basins to increase their activity in,” drastically cutting the time taken up making their own analysis of the full-cycle cost structure.

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