The Replacement Costs of Domestic Crude Oil and Natural Gas Reserves

Abstract

ABSTRACT The costs of replacing domestic oil and gas reserves are today dramatically different than during the "boom" years of the early 1980s. Changes in costs, tax laws, and drilling efficiency have altered the outlook for oil and gas and thus have fundamentally revised least-cost supply strategies. To provide a perspective on the new outlook, it is timely to re-examine the economics of finding and producing domestic oil and gas reserves. For this, the paper reviews recent data on domestic oil and gas expenditures, reserve additions, drilling costs and supply sources. The paper also examines the response of drilling costs to changes in oil prices, rig utilization, and technology. The paper illustrates that least-cost reserve replacement will consider a supply portfolio that includes at least six sources: (1) undiscovered conventional oil and gas, (2) reserve growth from infill drilling, (3) oil (and particularly gas) from the deepwater OCS, (4) natural gas from low permeability sources (tight sands, coal seams and Devonian age shales), (5) enhanced recovery of heavy and light oil, and (6) expanded development of the North Slope of Alaska. Specific case studies of coalbed methane development in the Warrior Basin, infill drilling in the Permian Basin, and heavy oil steamflooding in the San Joaquin Basin provide examples of how various companies are pursuing their individual strategies.