Why An Average Gas Well In The Western Canadian Basin Will Probably Not Turn a Profit Over The Next 8 Years

The average gas well drilled in the Western Basin will not turn a profit if you look at the numbers associated with drilling. Considering that 65% of the production in the Western Basin is Gas, this should be cause for alarm.

Reference Data:

In 2008 the average well costs $2.4M to drill according to the National Energy Board.

The average reserve life index (proven + probable) for the Juniors (500 to 10,000 BOED) is 9.7 years and 11.7 for the intermediaries (1o,000 to 100,000 BOED) - for this example I will use 8 years as a probable reserves life index.

The average price per MCF to provide a 15% ROI (in 2008) was $7.63/MCF according the National Energy Board.

The average well produces 30 BOED as of 2007.

Sproule's average price for natural gas/mcf for the next 10 years as of May 2009:

2009: $3.61
2010: $5.48
2011: $6.33
2012: $6.30
2013: $7.14
2014: $7.16
2015: $7.18
2016: $7.21

So given that the average well produces 30 BOED and may last 8 years, then the following 3 scenarios will play out given the current and future revenues as listed with Sproule and costs of $7.63:

Without Decline In Production and No Escalation in Costs Over 8 Years:

Total Revenue: $3,313,345
Total Costs: $3,411,144
Difference: -$97,799


With Decline @ 10% Decline In Production - No Escalation in Costs Over 8 Years:

Total Revenue: $3,406,283
Total Costs: $4,283,080
Difference: -$876,798


With Decline @ 10% and a 3% yearly escalations on Costs Over 8 Years:

Total Revenue: $3,406,283
Total Costs: $4,688,742
Difference: -$1,282,460


So given the different scenarios, if I were in a gas weighted company, I would be wondering how I might ever get out of the downward spiral and what alternatives are available to me. Few and limited. Also, if I were invested in gas weighted companies, I would seriously think about whether I would keep my money invested in these companies. In fact, in a future entry, I will show how very few intermediaries (10K to 100K BOED) and juniors (500 to 10K BOED) can turn a profit. I still don't get how they stay in business. Most of the companies that are still producing uneconomical wells are probably doing so just to get the cashflow, which is a dangerous game with natural gas prices where they are. As of writing this, July 11th 2009, AECO spot price on Natural Gase prices is $2.87/mcf.

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 info@argentis-group.com.