The Past 10 Years - Costs Are Out of Control

If you work in the oil and gas industry, you already know that the way that business was done in the past won't help you today. Basically the numbers show it and these numbers show why we are in such trouble right now.

For example, over the last 10 years (1997 to 2007) the following happened in the oil and gas market in the Western Canadian Basin:

• Capital expenditures to increased 86% from $17B to $31.6B
• Production increased 16% from 5.14M BOED to 5.97M BOED of which gas production increased 5% and oil production increased 31%
• Find and Develop Costs increased 61% from $9.14/BOE to $14.53/BOE and currently F&D costs are $16/BOE
• Production per well dropped 40% from 50 BOED to 30 BOED
• Number of wells increased 92% from 103K to 198K

So if capital expenditures go up by 86% and production only goes up by 16%, there is a serious problem. Spending more to get less is not an economical model that you should follow, unless you are hell bent on bankruptcy. This also holds true to F&D costs, if they have increased by 61% and you are only finding 16% more production, then the math just doesn't work.

If the number of active wells pretty much doubles and production decrease per well, you can also figure out that all those extra wells either are draining the other wells, or they do not produce as much or there are a lot of dry/dud wells that are bringing the average down.

With low gas prices (July AECO prices are $3.27/mcf as of June 27, 2009 when I wrote this) I would question why anyone would even think about drilling a gas well in Western Canada. I can go on about this topic and will on another posting to show how the average well will never turn a profit in the next 10 years if ever, unless gas prices dramatically increase (which according to Sproule's price forecast), some radically new technology is found, massive government subsidies or low cost reserves are found.

Basically, if you look at the past 10 years, and if costs decrease as they are expected to by 25% to 30% this year, there still will be a misalignment of costs in comparison to the increase in production. Bottom Line: Troubles ahead if something drastic doesn't change.

These opinions are mine and may not reflect your view. If you would like to contact me, then please feel free to do so at chris@argentis-group.com.