Ziff Energy Whitepapers
The North American natural gas producing industry is ‘under siege’: the current price is far below the
full cycle cost to replace gas that is produced and sold. The details of the predicament are described.
With this paper, I want to start with some of my solutions first.
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Increased Shale Gas production has potential to dampen gas prices in North America. This paper presents
a predictive gas production model using assessments of new gas well initial productivity, decline rates, and
forecasts of connected wells through an assessment of the basin’s maturity and cost. Methodology of full cycle
gas cost assessment includes the analysis of operational expenditure, finding and development (F&D) costs,
royalties, taxes, overhead, and producer’s return for different basins. The gas fundamentals of supply and
demand are related through gas prices, which are forecast based on analysis of supply and demand in a pendulum, non-equilibrium model.
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For each Mcf of gas produced at today’s low natural gas prices, valuable gas reserves are being
depleted that cannot be replaced by the cash flow generated. Ziff Energy believes the future of
Canadian conventional gas is at a crossroads – can it be competitive, even with royalty relief?
The outcome has significant implications for all stakeholders in the Canadian gas industry,
from Alberta provincial revenue and local community employment by service companies, through
processors and pipelines, to end-users.
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Massive value destruction is occurring for the shareholder, or unit holder, for each Mcf of gas
produced today at low prices. Core gas reserves are being sold/depleted that simply cannot be replaced by the
cash generated. One of the best short term strategies is ‘shutting in’ a portion of high cost production.
While Oil prices have recovered very quickly from their dramatic plunge, Gas prices remain extremely low.
At a price of C$3/Mcf at AECO, gas is selling for a 73% discount to $65 oil, and at $4.50/Mcf, still a 60%
discount --- disconnected from the traditional oil/gas price relationship. This value gap is not recent, it is a
systemic issue for North American gas, however today it is a severe issue. For over 3 years, Ziff Energy has
voiced its concern regarding the dire economics of new gas in Western Canada. The chart below shows an
increasing ‘lost Value’ gap between producers’ average full cycle cost to add new gas, and what the market is
willing to pay.
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Like many other older producing regions, Indonesia has many mature assets, particularly oil.
These are under particular economic strain during times of low oil prices. Extending the life of
mature fields involves a mix of (i) both new technology & capital, and (ii) operations focus. This whitepaper
addresses the latter --- the necessity to improve production operating efficiency using comparative asset–level
Benchmarking as a tool. Benchmarking may measure the performance of two aspects of achieving operating efficiency:
1) maximizing uptime reliability, and 2) optimizing operating costs to achieve the lowest unit operating cost.
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Many people talk about an ‘Oil & Gas’ industry in Canada – the truth is that the conventional industry is mainly
gas now --- the main oil is Oil Sands! Since 1998 gas drilling has surpassed oil drilling activity, with more than
2 gas wells for each oil well in 2007. Drilling for natural gas, not oil, drives Alberta’s massive service
industry, which stretches all across Alberta, especially rural towns. Figure 1 shows the dominance of gas
drilling over the past decade.
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