Abstract This paper, through the development of a cost model, estimates the long-run supply price of oil from existing reserves in Alberta. Proration, payments to mineral owners and taxes are considered, and wellhead costs are computed under various assumed conditions. INTRODUCTION THIS ARTICLE concerns the estimation of the long-term cost of oil recovered from existing reservoirs in Alberta. The long-term nature of the cost defined must be emphasized. The cost does not reflect the incremental economics of an additional ban-el produced from discovered and developed oil reservoirs. This analysis considers the long term when all expenditures are flexible. Hence, long-term cost embraces expenditures incurred in all sectors of the producing segment of the petroleum industry: exploration, development and production. The method of analysis employed in this article is general in the sense that it may be applied to any area for which data exist. However, the specific characteristics of the model developed are conditioned and limited by the nature of the data available in Alberta. Section II below discusses some definitional problems. Section III relates to the cost ‘model’. The results are tabulated and reviewed in Section IV. Section V concludes the analysis. Throughout the article, the past existence of proration is recognized and its future continuation assumed. II – DEFINITIONAL PROBLEMS The intention of exploration is the discovery of hydrocarbon deposits. Although geological and geophysical data may indicate a higher probability of occurrence for one hydrocarbon as compared to another in a given area – for instance, gas as compared to oil it is impossible to so direct exploration that its result will be confined to the discovery of a previously specified hydrocarbon. Hence, most exploration costs are joint in relation to a necessarily mixed final output – gas, oil and other products – and, in strict economic terms a specific cost of oil does not exist(1). Thus, the attribution of cost to oil in the analysis below is artificial in the sense that it does not supply a criterion for individual investment decisions. Such decisions would continue to observe the joint-cost character of the problem. Notwithstanding the nature of the cost of oil in an area where oil is a joint product, it is frequently necessary in the formulation of policy, to assess the cost of oil as an individual product; for instance, to compare its cost to costs in other supply areas where oil is Virtually the sole product, as in some Middle Eastern countries. It is dear that for an area such as Alberta, where significant amounts of gas and associated products have been discovered such an assessment must recognize and incorporate an adjustment to reflect this feature. To do other-wise would ignore the fact that the pattern and intensity of exploration in Alberta undoubtedly would have been different in the absence of significant discoveries of gas. There are basically two possible methods of adjustment.