Finding, operating costs up

Gary Park

Record oil and gas drilling in Western Canada in 2000 also yielded some of the highest reserve-replacement figures posted in recent years, but those successes were accompanied by a sharp rise in finding and operating costs, say two reports by Ziff Energy Group.

The Calgary-based consultant said oil replacement jumped to 154 percent of production from 86 percent in 1999, due to strong results in southeastern and northern Alberta and southwestern Saskatchewan. The study said the rate of replacement, although short of the 178 percent to 201 percent in 1996 to 1997, were the third highest in the past eight years and the reversal of negative trends in 1998 and 1999.

Heavy oil drilling bounced back in 2000, up 114 percent, while other oil categories increased by 60 percent to 90 percent. On the gas side, drilling and improved recovery boosted the replacement level to 120 percent, helped by a 30 percent gain in medium and deeper drilling as part of a record 8,926 well completions.

Ziff project manager Razvan Sima said Canadian E&P companies are also taking a more conservative approach to their reserve bookings, now that the Alberta Securities Commission is moving towards tougher rules after a series of high-profile reserve write-downs in the late 1990s.

The study said the industry average finding and development costs rose to C$8.60 per barrel of oil equivalent, based on a gas-to-oil conversion rate of 6:1 for proven reserves and C$11.40, based on the U.S. standard conversion rate of 10:1.

In a separate study, Ziff said average oil operating costs climbed 30 percent to C$6.10 per barrel of oil equivalent, at a 6:1 conversion rate, from C$4.70 in 1999. The average cost of gas rose 39 percent to C$0.58 per thousand cubic feet equivalent from C$0.42 in 1999.

Project manager Court Mackid said the sharp rise was a result of operators scrambling to obtain as much production as possible during a period of high commodity prices. “Your marginal costs usually go up when that happens,” he said. But Mackid said the new price cycle means companies will “have to be very observant of their operating costs,” or they risk draining their resources.

The breakdown for field overheads, contract services and trucking climbed 47 percent for oil and 28 percent for gas, while combined labor and field supervision costs accounted for 18 percent of the total compared with 6 percent in 1999.

The biggest oil increase occurred in eastern Alberta where operating costs for pumping heavier crudes rose 50 percent. Gas operations in southeast Alberta and southwest Saskatchewan showed a 65 percent jump.

Ziff chief executive officer Paul Ziff said that as producers try to maximize cash flows “reducing operating costs is their quickest lever,” noting that those who failed to heed warnings in 2000 to launch energy efficiency programs “suffered the full impact of higher costs.”