Updated May 2022
The supply cost of a resource project is the minimum constant dollar price needed to recover all capital expenditures, operating costs, royalties, and taxes, as well as to earn a specified return on investment. Supply costs serve as an indicator of a project's economic viability and is presented as the value required per unit of production.
An understanding of the underlying geology allows the most effective and cost-efficient completion technology to be used. Supply cost for different geological plays and Petroleum Services Association of Canada (PSAC) areas varies significantly because of
- differing production rates,
- natural gas liquids content in the gas,
- well types,
- drilling and operating costs, and
Wells with a long total measured depth, which is typical of horizontal wells, tend to have high capital costs; however, these costs are more than offset by typically high initial productivity of these type of wells, leading to lower supply costs.
Wells that target liquids-rich gas typically have lower supply costs. As a by-product, liquids add to revenues, offsetting the costs of a well. Wells targeting liquids-rich gas are mainly located in
- Foothills Front (PSAC area 2),
- Central Alberta (PSAC area 5), and
- Northwestern Alberta (PSAC area 7).
Supply Costs by PSAC Area
Table S5.6 shows the estimated costs for gas, shale, and coalbed methane (CBM) natural gas wells by PSAC area based on 2021 estimated costs and production profiles. Supply costs are lowest for horizontal wells in the Foothills Front and Northwestern region (PSAC areas 2 and 7).
With the exception of Northwestern and Foothills Front regions of Alberta (PSAC areas 2 and 7), natural gas supply costs increased in 2021. Supply costs rise when capital costs, operating costs, or production decline rates increase. Whereas supply costs decline when initial productivity rates and natural gas liquid prices increase. According to the latest PSAC well cost study, drilling costs for gas wells in Alberta were on average 13 per cent higher than in 2020. With the supply disruption and soaring inflation rates, North American upstream operating costs were estimated to be 5 per cent higher in 2021 compared to 2020.
Supply costs are based on representative wells in each PSAC area. Results may not reflect wells that differ from the representative well profiles used in the analysis. The analysis also includes a separate set of supply costs for certain PSAC areas to reflect the industry practice of drilling more than one well or lateral leg from a well pad, commonly referred to as a multiwell pad or multilateral well. Operators of these wells can take advantage of economies of scale and cost efficiencies, resulting in lower costs per unit of output.
Recompletions were not considered in the analysis. They are substantially cheaper than new drills but have weaker initial productivity rates.