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BC Natural Gas Industry Competitiveness Study Natural Gas Industry Competitiveness Study September 1999.

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Presentation on theme: "BC Natural Gas Industry Competitiveness Study Natural Gas Industry Competitiveness Study September 1999."— Presentation transcript:

1 BC Natural Gas Industry Competitiveness Study Natural Gas Industry Competitiveness Study September 1999

2 BC Natural Gas Industry Competitiveness Study BC Gas Demand Forecast Domestic and Export markets are expected to grow at a rate of 1 to 2% annually. –This excludes demand created by the addition of the following major projects. Additional demand will be created by Vancouver Island cogenerators, Burrard Thermal Plant, and the Alliance Pipeline by the year 2001.

3 BC Natural Gas Industry Competitiveness Study BC Gas Demand Forecast

4 BC Natural Gas Industry Competitiveness Study Gas Fields in Northeast BC with Established Reserves

5 BC Natural Gas Industry Competitiveness Study Northeast BC Remaining Gas Potential

6 BC Natural Gas Industry Competitiveness Study Northeast BC Established Gas Reserves as of December 31, 1998 in Trillion Cubic Feet of Marketable Gas

7 BC Natural Gas Industry Competitiveness Study Northeast BC Gas Reserves by Cost Areas

8 BC Natural Gas Industry Competitiveness Study Production Forecast to Meet Demand Base Demand Forecast BC Marketable Gas Well Producibility Forecast Year Marketable Gas Well Producibility and Average Gas Production in 10^6 m3 Connected Well Producibility Unconnected Well Producibility Producibility from Well Addition to meet Peak Day Demand Average Demand Peak Day Deliverability Restricted to Infrastructure Required Infrastructure

9 BC Natural Gas Industry Competitiveness Study Reserve Addition Required to Meet Demand

10 BC Natural Gas Industry Competitiveness Study Reserve Additions per Well Reserve Additions per well have been declining Considerable amount of drilling activity is required to counteract declines in existing pools and meet future increases in demand

11 BC Natural Gas Industry Competitiveness Study Reserve Addition Per Meter Drilled

12 BC Natural Gas Industry Competitiveness Study Gas Drilling Forecast Gas Intent Wells Drilled to Meet Demand Year Number of Gas Intent Wells Historical Low Demand Base Demand High Demand Historical Forecast

13 BC Natural Gas Industry Competitiveness Study Forecast of Cumulative Gas Wells Forecast of Gas Intent Wells Required to Meet Demand Year No of Gas Intent Wells High Demand Base Demand Low Demand NEB (1994 to 2010) Historical Forecast Possible Drilling Location (Excludes PAS) 33,000

14 BC Natural Gas Industry Competitiveness Study HISTORY n Done with co-operation and encouragement of Industry and CAPP. n Terms of Reference distributed in Fall Industry was invited to contribute comments and data. We actively sought data, we kept industry and CAPP informed. n Data, methodology and progress presented to industry at BC Petroleum Executive Forums June 11, 1997 and December 11, n Industry and CAPP input and consultation from 1996 to We used every piece of data provided by industry and CAPP. n Preliminary results presented to CAPP, Westcoast, BC Gas, BCUC, MoFCR Treasury Board Staff and other stakeholders in September/October n Work stopped in 1998 for about 10 months while new royalties were finalized under OGI 1.

15 BC Natural Gas Industry Competitiveness Study We are here to: n Explain the data and methodology. n Show the results. n Receive comments and any further data. n Identify problems with BC cost competitiveness and suggest and receive suggestions on solutions to continue the Oil and Gas Initiative process.

16 BC Natural Gas Industry Competitiveness Study Study Objective: n compare the cost competitiveness of natural gas exploration, production, gathering and processing in British Columbia to the costs of the same processes in Alberta. Costs and revenues are to the plant exit.

17 BC Natural Gas Industry Competitiveness Study Methodology: Build an “expected case” for each area in B.C. and Alberta by averaging past actual events in each specific area n Define Global Fiscal Parameters for the study n Define Areas n Representative Pool Sizes n Production Profiles, Loads n Pool Areas n Drilling Success Rates n Gas Compositions n Land Costs n Drilling Costs / Pool Depths n Exploration Costs n Production / Gathering Capital Costs n Third Party Production / Gathering Fees n Processing Plant Capital & Operating Costs n Third Party Processing Fees n Abandonment Costs n Cash Flow Model each case n Unit Cost Calculation n Rank cases

18 BC Natural Gas Industry Competitiveness Study FISCAL PARAMETERS CERI 1996 Plant Gate Price Forecast n similar to MEM forecast n distinct differential between Alberta and BC plant prices n consistent but conservative compared to other forecasts n developed by a respected outside agency n necessary to make our cash flow model run Discount Rate: n Final Results discounted at 7% n reflects long term cost of money - study is primarily concerned with costs rather than profit.

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27 POOL AREA CALCULATION Calculated using: n database correlations of wells linked to discovered pools n database correlations of historic values of reserves produced per well n PEEP production profiles which resulted in reasonable pool declines

28 BC Natural Gas Industry Competitiveness Study PRODUCTION PROFILES AND WELL LOADS n Aggregated a production profile from all wells coming onstream in 1994 in each area using Merak Forecast. n Maximum rate used as initial rate. n Initial rate combined with pool reserves used to calculate decline. n Well load factors calculated from well onstream time. (Actual production hours divided by possible production hours)

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31 DRILLING COST ESTIMATE METHODOLOGY Alberta Drilling Costs: n Drilling days and depth determined for each area. n Adjusted to PSAC study estimates for wells in same region. n Results compared to drilling cost data in Natural Gas Royalty Review outline, Sproule Associates Oil and Gas Property Evaluation text, and ERCB 92-A Ultimate Potential and Supply of Natural Gas in Alberta. BC Drilling Costs: n Drilling and completion data obtained from Ministry wellfiles - over 600 wells searched. n Adjusted using Alberta methodology.

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34 GATHERING AND PRODUCTION FACILITIES COSTS BC Gathering and Production Facilities n Capital and operating costs of pipeline, dehydrators, and field treatment plants based on 1996 Gas Production Facilities Study done for MEM for Producer Cost of Service (PCOS) determination. Alberta Gathering and Production Facilities Capital costs from several sources: n Recent survey of vendors installed equipment costs. n Studies such as Natural Gas Royalty Review Outline, Sproule Associates Oil and Gas Property Evaluation course, ERCB 92-A Ultimate Potential and Supply of Natural Gas in Alberta and CAPP Well Operating Cost Study. n Discussions with producers, contractors and government agencies. n Operating costs estimated at 10% to 15% of capital costs.

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36 PLANT CAPITAL AND OPERATING COSTS BC Plant Costs: n Delta Engineering Plant Cost Study completed for MEM. n Producer Gas Cost Allowance submissions. Alberta Plant Costs: n Oilweek annual plant statistics. n National Energy Board information. n Discussion with vendors. Plant Operating Costs: n Estimated at 10.5% of capital cost for new plants and 15% of capital cost for old plants. Inflation Index: n U.S. Energy Information Administration index for oil and gas operating and capital costs.

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39 THIRD PARTY PROCESSING COSTS BC Third Party Processing Fees n Negotiated Westcoast tolls for treatment and RGT service based on average gas composition. n Non-Westcoast plant fees based on replacement costs using JP 95 guidelines. Alberta Third Party Processing Fees n NEB information. n Data from Natural Gas Royalty Review Outline and ERCB 92-A Ultimate Potential and Supply of Natural Gas in Alberta. n Plant fees based on replacement costs using JP 95 guidelines. n Discussions with major plant operators.

40 BC Natural Gas Industry Competitiveness Study THIRD PARTY GATHERING AND PRODUCTION FEES BC Third Party Gathering and Production Fees: n Estimated from Producer Cost of Service (PCOS) data with returns based on the JP 95 formula. Alberta Third Party Gathering and Production Fees: n National Energy Board information. n Estimated based on replacement costs using the JP 95 guidelines.

41 BC Natural Gas Industry Competitiveness Study Unit Cost Methodology n Streams of Costs, Revenue and Production were discounted at 7%. n Unit costs are calculated by dividing the discounted cost by the discounted production to get $ per mcf. n Assigns a value for cost and revenue to each unit of production in a project.

42 BC Natural Gas Industry Competitiveness Study AREA COMPARISONS n Cash Flow Model each case n Unit Cost Calculation n Rank cases

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56 POSITIVES n Larger pool sizes, higher initial production rates, better drilling success rates. n Project Net Present Value and Rate of Return are competitive in many areas. n Direct burdens are very competitive. n Treaty 8 MOUs ==> Costs predictable. n EA Review thresholds have been raised. n WCB issues are not significant problems.

57 BC Natural Gas Industry Competitiveness Study Environmental Assessment Review Thresholds Subject to Review: n Plants greater than 200 mmcf/d and 2 tonnes sulphur per day. n Pipelines: n less than 4” diameter but longer than 60 km n diameter more than 4” but less than 12”, longer than 50 km. n diameter more than 12” and longer than 40 km. New thresholds effectively exclude the size of plants recently proposed and built, and most gathering systems and pipelines.

58 BC Natural Gas Industry Competitiveness Study WCB Issues n Large gap between WCB and Industry perceptions of operating environment (with Energy and Mines caught in between). n WCB: Problems resolved years ago after consultation. n Style difference - “Involved” vs. “Hands-off”. Regulations are similar in Alberta and BC. n Anecdotes or documented incidents? n 1998 Drilling Industry Assessment Rates: n Alberta: $1.99 per $100 payroll n BC: $1.69 per $100 payroll

59 BC Natural Gas Industry Competitiveness Study Labour Cost n Wages are about 3% higher in BC due to the negotiated exclusion from the Employment Standards Act. (Drilling example) n Used CAODC data for a typical rig. n Same hours worked but more hours paid as overtime.

60 BC Natural Gas Industry Competitiveness Study Costs Due to Resource Characteristics n Completed well costs are higher in BC because pools are deeper, and often in remote areas. Road improvements would help reduce these costs. n Facility and processing costs are higher due to higher CO2 and H2S contents. n Revenue is less due to lower liquids content.

61 BC Natural Gas Industry Competitiveness Study Well Load Factors are lower in BC. n Ratio of hours a well operates to possible operating hours (“on-time”). n Significantly affects economics and profitability. n Comparison suggests plant capacity or suitability is less optimal than in Alberta.

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63 Facilities constrain production and well connections and increase costs. Example: Well Load Factor Effects - BC 11 Area (2 horizontal wells case) 100%* Well Load Factor: n ROR = 33.7% n NPV = $10,363,400 Observed 73% Well Load Factor: n ROR = 25.1% n NPV = $8,193,100 * 100% used as an example only - unrealistic in practical terms. Best observed is 95% in AB 10.

64 BC Natural Gas Industry Competitiveness Study Trends: 1. Increasing proportion of connections to smaller plants due to: n higher well loads n more efficient liquids extraction n flexible tolling 2. Increasing exploration target land sales in border areas and near smaller plants.

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66 Taxes n The Compressor Fuel Tax adds two cents per mcf to costs to the plant exit. n Social Services Tax increases costs 2.4%. n Property taxes appear to be slightly higher in BC. n Estimated at 2.4 cents per mcf in Alberta versus 2.8 cents per mcf in BC. Need better data - too much uncertainty.

67 BC Natural Gas Industry Competitiveness Study Social Services Tax increases costs by 2.4%, not 7%.

68 BC Natural Gas Industry Competitiveness Study Roads n Poor public road infrastructure increases all costs, constrains production and revenue and discourages investment.

69 BC Natural Gas Industry Competitiveness Study OPPORTUNITIES FOR IMPROVEMENT n Improve road infrastructure and maintenance. n Improve plant infrastructure and promote even more competition in the processing sector. n Improve liquids infrastructure. n Fort St. John as centre of competitive service industry.


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