When discussing natural gas prices, people may think of Henry Hub or another gas-trading hub. However, when discussing natural gas costs, there is no accepted measure to turn to. A simple analogy to consider is to examine the cost of a backyard do-it-yourself BBQ hamburger that you cook at home with the family. The layers are fairly simple: a bun, green lettuce, red tomato, meat, pickle, and cheese to top it off. The cost to buy these ingredients might come to $1.25.
Similarly, the cost of the natural gas hamburger includes royalties/taxes, operating costs, finding and development expenses, overhead, some profit (the return to investors) and the cost of transportation to get the gas to market. The total of these increments added to more than $7 an Mcf in 2008, far more than the price realized at the trading hubs.
A good handle on the relative cost to explore, develop, produce and market natural gas across the various gas basins in North America is important to an investor who wants to determine where to direct funding for the best return. For years, getting accurate cost data for gas from various producing basins was very challenging, if at all possible.
Based on ground-breaking research, in early 2008, Ziff Energy published the first complete, full-cycle gas analysis of 85 plays from two dozen gas basins. The next cost study of North America gas basins is currently being finalized using cost data as of late 2009 (the current low gas price/low cost environment). Economic ranking of the gas basins across North America will determine which regions producers are funding and which basins will see continued slowdown.
For mergers, acquisitions and divestitures, is it better to buy gas reserves, or is it better to explore, develop, produce and market?
The answer depends on the specific gas basin. This age-old question is being asked by boards of directors and by executive managements conducting due diligence on pending deals. Even service companies, such as drillers, pipelines and suppliers, would benefit by knowing the economic ranking of the major gas basins so they can focus their services and equipment to where producers need it most.
State and provincial governments will be better stewards of their producing communities if they understand the relative economics of basins. They will be better able to assess the impact of tax/royalty options and development issues which will impact (positively or negatively) incremental investment by operators, and therefore increase regional gas production.
Exploding growth among various shale-gas basins leads to a similar question. Which shale-gas basin is most attractive to invest in from a total cost perspective? Cost assessments of Barnett (Fort Worth), Arkoma, Haynesville, Marcellus, Appalachian and Canadian shales will be included in the upcoming study.
Graphically impressive, the new edition of the North American gas-basins study will help to explain the cost structure of all the significant conventional and unconventional gas basins.
About the Author: Bill Gwozd, P. Eng., is vice president, gas services, for energy-research and -consulting firm Ziff Energy Group. He can be reached at 403-234-4299 or firstname.lastname@example.org.
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