Costs of Finding And Developing Crude Oil And Natural Gas Reserves In Canada

Abstract

Introduction This study confirmed that the cost of finding, developing and producing crude oil and natural gas is projected to undergo significant increases during the projection period. It is recognized that federal and provincial governments have learned to utilize crude oil and natural gas as large sources of revenues; however, it must be recognized that the appetite for petro-dollars must be tempered in light of industry"s need for funds. If Canada is to develop self-sufficiency in crude oil, while maintaining an adequate reserve base for natural gas, care must be taken so as not to jeopardize that objective. This goal can be reached by allowing industry post-tax profits consistent with inflationary pressures and the increasing difficulty and cost of finding, developing and producing conventional hydrocarbons. Scope of Analysis This study presents a projection of the costs of finding and developing crude oil and natural gas reserves in Canada during the period 1980 to 2000. The projected cost data are based on a statistical analysis of historical finding and development costs in Canada for the period 1947 to 1979, related to the annual changes in the reserves of crude oil and natural gas. Data Sources The data sources used herein include the Statistical Hand (Year) Book of the Canadian Petroleum Association and publications of the Alberta Energy Resources Conservation Board. General Observations The data presented herein pertain to Canada as a whole and portray projections of the expected aggregate experience of industry in finding, developing and producing crude oil and natural gas from conventional sources. Projections of the costs of developing and producing synthetic crude oil, upgraded conventional heavy crude oil or synthetic natural gas are not included. In analyzing and projecting finding, development and production costs, royalties and income taxes have been excluded. The results of this study can be used for several purposes, for example: decisions on participatory investments in exploration, production activities of energy-using industries and taxable/non-taxable investors. Also, the cost-effectiveness of the exploration, development and operating effort of an individual corporation can be compared with that of industry as a whole, and margin comparisons are possible. The methodology underlying this study can be described as an inventory model. Accordingly, Canada"s remaining conventional reserves of crude oil and natural gas represent an inventory changing annually as a result of additions to, extensions and revisions of and production from the reserve inventory. The embedded costs of this inventory also vary annually as a function of costs of reserve additions, the costs of production and the time value of funds invested in the inventory. Finding Costs Exploration expenditures considered in this study consist of four categories: geological and geophysical; drilling; land acquisition plus rentals; and "other", as defined by CPA. In calculating historical finding costs (per unit), geological and geophysical expenditures plus land acquisition costs and rentals for any given year were amortized over a 3-year period for the purpose of recognizing the lag involved in discovering reserves.