Margins down despite lofty wellhead prices
Rising costs and declining production rates are squeezing the margins of many North American gas producers despite lofty wellhead prices, according to a report from Cambridge Energy Research Associates.
"Conventional wisdom is that all producers are enjoying a windfall from higher prices," said Michael Bodell, CERA's director of upstream gas strategies. "However, the less visible cost of gas production has moved up as dramatically as market prices."
It is clear that rising service costs have begun to take away much of the margin in many wells and plays despite historically strong market prices.
-Michael Bodell
The multi-client study, which examined 2005 cost and volume data for 48,000 wells in 50 North American basins, also found "a dramatic shift toward unconventional gas production, which now accounts for a quarter of total output." CERA released the report February 2.
According to the report, the weighted-average cost for developing gas reserves in 2005 ranged from about $4/Mcf to $12/Mcf. "Judged against the record prices of 2005, which averaged $8.80/Mcf at Henry Hub, more than 6% of basins had costs high enough that they would fail to achieve a 10% rate of return-on-investment," said CERA, a division of IHS.
Soaring prices -- which were partly driven by rig-damaging hurricanes in the Gulf of Mexico -- "triggered a tremendous response in drilling by gas producers, leading to nearly decade-high reserve additions of 26.4 Tcf and added production of 14.7 Bcf," Bodell said.
However, "viewed in the context of the market and cost environment at the time of drilling, it is clear that rising service costs have begun to take away much of the margin in many wells and plays despite historically strong market prices."
Meanwhile, the record number of well completions over the past few years is "being totally offset by declining per-well productivity," he added. "The fundamental driver of the North American E&P challenge is the relative maturity of the natural gas resource base. Although gas resources are available and new plays are being identified and developed, many of these resources are deeper, smaller, technically more challenging or more distant from markets."
The report said, however, that producers who have focused their efforts in certain regions and on specific types of gas plays still enjoy returns well above 10%. "The E&P companies that have shifted their portfolios to include these lower-cost resources, particularly the early movers, are recognizing substantial cost advantages," Bodell said.
For example, CERA found that a combination of higher gas prices and improved drilling and rock fracturing technology has accelerated development of unconventional resources such as shale gas, tight gas and coalbed methane.
Created: March 12, 2007
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