Strong natural gas drilling, driven by healthy oil and gas prices and rising cash flow in the first nine months of 2001, pushed up Canada’s industry average for finding and development (F&D) costs in the Western Canadian Sedimentary Basin by 46% last year, according to a new Ziff Energy Group study. However, through the first eight months of 2002, gas well completions are off 20% from a year ago.

Ziff Energy’s 16th annual “2002 F&D Study” assessed exploration and development spending at a strategy level in Western Canada and found that with the increased drilling, costs were up as well last year, to C$12.50/boe, or C$2.10/Mcfe, from C$8.60/boe, or C$1.45/Mcfe in 2000. “As commodity prices rebounded from the 1999 lows, so did activity levels,” according to the report. “While activity grew, so did the industry average F&D cost,” based on proven reserves, and gas converted at 6 Mcf/boe.

In 2001, gas drilling activity jumped 25% over 2000 in Western Canada, with most of the gains in shallow gas drilling. And in Northwest Alberta shallow gas, drilling jumped 64% over 2000. Other strong increases of 30-40% occurred in the Foothills and in British Columbia’s Plains region. There were also increases from 16-23% in other gas strategies, Ziff Energy reported. However, after jumping 98% in 2000, oil well completions were off 14% in 2001. The oil price fall at the end of last year also has dropped drilling 28% through August, over a year ago.

Meanwhile, boe production replacement sharply dropped, down 84% in 2001 from 118% in 2000, the lowest replacement in the past five years. Ziff Energy said the drop was caused by “low results and negative gas revisions. Gas reserves added by drilling, excluding revisions, and improved recovery achieved 102% improvement from the year before. After negative revisions totaling 15%, replacement was 87%, the second time in the past five years that gas production was not replaced. Oil production replacement also dropped significantly, to 77% after reaching 137% in 2000, mostly because of low replacements in southeastern Alberta, southwestern Saskatchewan and other areas. “This is the lowest level in a decade, well below the highs of 178-201% in 1996-1997,” reported Ziff Energy.

Comprehensive multi-year, full cycle F&D costs were determined for 13 oil and gas strategies in Canada. Comparing 2001 results against 2000, two strategies, southern shallow gas and west central Alberta sour gas, showed reduced costs, while costs were up for all the other strategies. In fact, F&D doubled in four strategies because of writedowns of reserves, high capital investments that focused on exploration, combined with few reserves added through discoveries or extensions.

Ziff Energy’s project economics, developed with Sproule Associates Ltd., were determined for 34 oil and gas plays, using a discounted cash flow approach. The method, which includes full cycle capital spending based on multi-year average F&D costs, Ziff Energy estimated that more than half of the companies in the Western Canadian Sedimentary Basin achieved a rate of return of more than 10% last year.

To learn more about the study, visit the web site at www.ziffenergy.com.

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