The Replacement Costs of Domestic Crude Oil and Natural Gas Reserves

SPE Members Abstract The costs of replacing domestic oil and gas reserves are today dramatically different than during the "boom" years of the early 1980s. Changes in costs, tax laws, and drilling efficiency have altered the outlook for oil and gas and thus have fundamentally revised least-cost supply strategies. To provide a perspective on the new outlook, it is timely to re-examine the economics of finding and producing domestic oil and gas reserves. For this, producing domestic oil and gas reserves. For this, the paper reviews recent data on domestic oil and gas expenditures, reserve additions, drilling costs and supply sources. The paper also examines the response of drilling costs to changes in oil prices, rig utilization, and technology. The paper illustrates that least-cost reserve replacement will consider a supply portfolio that includes at least six sources:undiscovered conventional oil and gas,reserve growth from infill drilling,oil (and particularly gas) from the deepwater OCS,natural gas from low permeability sources (tight sands, coal seams and permeability sources (tight sands, coal seams and Devonian age shales),enhanced recovery of heavy and light oil, andexpanded development of the North Slope of Alaska. Specific case studies of coalbed methane development in the Warrior Basin, infill drilling in the Permian Basin, and heavy oil steamflooding in the San Joaquin Basin provide examples of how various companies are pursuing their individual strategies. Introduction During this period of low oil and gas prices, a persistent gas surplus, and major uncertainties about persistent gas surplus, and major uncertainties about future OPEC market strategy, the domestic oil and gas industry needs low-cost reserves. For firms to survive and prosper through this period of turbulences they need to continually pursue the answers to three key questions: What has been the past and may be the future costs of replacing oil and gas reserves? What developments are on the horizon that could alter the current conventional wisdom and outlook on oil and gas economics? What portfolio of supply sources leads to a "least cost" investment strategy? This paper provides background and analysis on five topics that address these key concerns, namely:Perspective on oil and gas reserve additionsReview of oil and gas revenues and expendituresDiscussion of the relationship of costs, prices and technology maturationAnalysis of reserves finding and development costsPresentation of a portfolio for future sources of oil and gas reserves PERSPECTIVE ON OIL AND GAS RESERVE ADDITIONS PERSPECTIVE ON OIL AND GAS RESERVE ADDITIONS After six impressive years that saw the U.S. maintain high rates of oil and gas production, replace its hydrocarbon reserves, and push the energy crisis onto the "back burner," concerns about domestic energy supply loom again on the horizon: P. 525