One of the most repeated claims heard in the financial media is that it is getting more and more expensive to find oil and gas. The reserves may be out there, they say, but they are already so expensive to develop, and will get even more expensive in the future.
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This is clearly not true in some of the fastest growing resource areas in North America, the oil and natural gas shale plays that have become the darling of the industry the last decade.
In these plays costs are actually going down year over year. There are several reasons for this. Service costs, including rig rates have fallen sharply year over year, as idle capacity flooded the market. The other and more important reason is because of the increased efficiency by the exploration and production industry as they develop acreage in the various plays.
Southwestern Energy (NYSE:SWN) has 71% of its proved reserves in the Fayetteville Shale in Arkansas. This shale is considered one of the more mature ones in North America, although still a high growth area.
The company has improved its initial production rate on wells here from 1.261 million cubic feet per day in 2007, to 3.611 million in the second quarter of 2009. It has done this with longer laterals on multi stage hydraulic fracturing operations. Southwestern Energy has seen its finding and development costs fall from $2.55 per Mcfe in 2007 to $1.53 per Mcfe in 2008.
GMX Resources (Nasdaq:GMXR), which is developing its acreage in the Haynesville Shale, has reduced its drilling costs from the $8-9 million range to the current $6.5 million.
Oil shale plays are no different. In the Bakken Shale in North Dakota, Continental Resources (NYSE:CLR) has reduced its time to drill on each well from 45 days in 2008, to 28 days in the first half of 2009. This leads to a huge savings in cost per well since many costs are leased by the day.
Many non-shale plays are seeing lower costs and efficiencies. Ultra Petroleum (NYSE:UPL), which is the leader in the Pinedale field in Wyoming, has cuts costs sharply over the last three years. Its time to drill has fallen from 61 days in 2006, to 21 days in the second quarter of 2009. This has led to a drop in well costs from $7 million to $5.25 million. The company has not sacrificed yield, however, as its average estimated ultimate recovery (EUR) has gone from 4.6 Bcfe in 2008 to 6.9 Bcfe in the second quarter of 2009.
It would not be accurate to extrapolate the experience of the independent exploration and production companies to the entire Energy complex, and finding and developments costs should be looked at on an industry wide basis, rather than in isolation.
The conventional wisdom among investors is that the cost of finding and developing oil and gas reserves can only go up. The industry has proven this wrong in a big way on the emerging shale plays in North America. Whether the industry can continue to squeeze costs and increase efficiency is a different matter. (For more, see our Oil And Gas Industry Primer.)
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