Operators in emerging shale gas plays can expect to experience high costs as the plays are developed because drilling and completion is akin to research and development. However, costs fall as operators build their land positions in a particular play and develop drilling programs with the right type of rigs and completion services, according to Houston-based Ziff Energy Group.

Over the last eight months the firm has been examining full-cycle costs incurred by gas producers in the United States and Canada. “In terms of increasing costs, clearly anything in the Gulf of Mexico [GOM] and also in Alberta is subject to quite strong inflation, although for different reasons,” Ziff Energy CEO Paul Ziff told NGI.

In the GOM, costs are being driven up by the fact that the Outer Continental Shelf and the deepwater represent an international play, where operators compete for rigs that can be relocated elsewhere in the world. “It takes a few months, but they can move to different parts of the world, and they are,” Ziff said. “So that keeps costs quite high.”

He noted that in the GOM, Independence Hub, which came on-line relatively recently and until a recent temporary suspension had been flowing about 900 MMcf/d of production from multiple wells (see Daily GPI, April 10), “augurs both a new concept and a bit of a new era for deepwater gas.” Previously, deepwater gas was all associated with oil production. Independence has allowed for nonassociated gas production from medium-size discoveries, he noted.

“I’d say that they have proven both the concept of aggregating smaller fields, which of course is not new for other parts of the world, but it is new in this area for gas,” Ziff said of Independence Hub. “And also it’s a demonstration of an onshore concept, which is having partners in the facilities or midstream who are not equity owners.

“The Independence Hub has been quite important for deepwater or Gulf of Mexico gas.”

As for Alberta, costs are being driven by inflation caused by booming development in the oil sands there, “which with the possible exception of Dubai is the largest concentration of industrial development anywhere in the world,” Ziff noted. The second factor driving up costs is the rise in value of the Canadian dollar relative to the U.S. dollar. So production priced in U.S. dollars, at the Henry Hub, for instance, does not yield nearly as much when converted to Canadian dollars as it once did. “It’s a very sharp price deflation at the same time there has been cost inflation,” Ziff said.

Finally, the Alberta government’s changes to royalties made last year have raised rates on all but very low-productivity gas production, Ziff said.

The Ziff study includes analysis of six primary gas types: conventional, coalbed methane, tight gas, shale gas, offshore and potential frontier supplies, and liquefied natural gas. For many gas basins, full-cycle costs are provided for several play types. For example, for tight gas in the Green River Basin in the U.S. Rockies the study includes full-cycle cost detail for the Jonah, Pinedale, Washakie, Sandwash, Mesaverde, Wamsutter, Frontier and Moxa Arch plays.

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