The Average Cost of a Well - Outpacing Inflation By Over 5 Times

In my first post on this blog, I brought the fact that capital costs associated with new wells has increased 86% from 1997 to 2007. This was on the entire Western Basin as a whole. Now I will look at it on the well level.

The spend per average well according to Canadian Association of Petroleum Producers, starting in 1997, was $1,670,674. Ten years later in 2007, the same costs associated on a per well basis were $3,253,541. These costs include: exploration cost, development costs, operating costs and royalties. On a per well basis, this represents a 95% increase in costs over a 10 year period. By the way, the biggest portion of these costs are services by driller, which also increased at the fastest pace.

The average yearly increase was 17% where inflation is typically 3%. At that rate, new well costs outpaced inflation by 5.78 times.

Another view would be demonstrated to the left. The red line shows what has happened from 1997 until 2007 and the blue line shows a straight inflation rate of 3% per year. In actuality, inflation only increased at 2.2% per year over this period.

If I owned an oil and gas company, I guess what I would be doing right now is wondering why these costs have escalated so much. Also, I believe that I would also be putting my drilling company on notice to ask them why they have increased costs so much and have really given very little back in return. Perhaps a new "Risk and Reward" model might work, where the driller can participate on the upside for a diminished fee.

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.