The aggregate, fully loaded finding and development costs among the five largest independent Canadian exploration and production companies jumped by 35% to $10.68/boe (Can.) last year, up from $7.86/boe in 2000 and a 5-year average of $8.35/boe, said a financial analyst with Salomon Smith Barney Inc., New York.
As with US independents, most of the fly-up in F&D costs experienced by the Canadians was driven primarily by a general escalation in drilling and other oil field service costs, along with a significant rise in acquisition costs in the relatively underexploited Western Canada Sedimentary Basin, said Salo mon analyst Robert Morris, in a report issued last month .
"However, unlike their US peers, the rise in Canadians' F&D costs was somewhat mitigated by upward reserve revisions and an increase in reserves added per well," Morris said. The five Calgary-based independents included in Morris's study group were Alberta Energy Co. Ltd. and PanCanadian Energy Corp.-which have since merged to form EnCana Corp.-Canadian Natural Resources Ltd., Nexen Inc., and Talisman Energy Inc.
Although the Canadian firms' average cost for drilling a well increased by more than 40% last year, Morris said, it was more than offset by a 60% jump in the amount of reserves added with each successful well, while US independents he tracks registered a 12% drop in reserves added per well.
"This is largely due to the fact that Canadian companies stepped up exploration spending last year, particularly along the international front, as well as the fact that, on average, Western Canada is less mature than most US properties," he said.
Costs, exploration outlays up
Among the five Canadian firms, exploration and development costs averaged $1.5 million/well in 2001, compared with $1.1 million/well in 2000. Reserve additions per successful well increased to 159,000 boe from just under 100,000 boe in 2000.
The Canadians put 20% of their total capital expenditures into exploration last year, up from 16% in 2000. That compared with only 15% of total capital spending among US independents tracked-the lowest percentage in the last 5 years, said Morris.
"This result also reflects the Canadians' increased focus on exploration spending last year, as exploration wells typically cost more than development wells and target prospects with higher reserve potential," he said.
The biggest increase in exploration spending among the five Canadian companies was in the international arena, up 60% from 2000 levels, while exploration spending within Canada increased by nearly 10%.
"Prospect sizes tend to be larger internationally than in Canada," said Morris. "In fact, the companies posting the largest increases in reserves per well, Talisman (115%) and Nexen (77%), derived the majority of their reserve additions from international oil discoveries."
Acquisitions
The cost of acquiring proven reserves also escalated by roughly 80% last year among the five Canadian independents. High commodity prices combined with record levels of excess cash flow in the first half of 2001 "resulted in many companies paying more for properties based on associated proven reserves," said Morris. "Canadian acquisition costs increased by roughly 86% in 2001, while international acquisition costs increased by 35%."
He said, "This dramatic rise underscores the overwhelming interest in Canadian property acquisitions last year, as non-Canadian companies looked to take advantage of the relatively underexploited regions in Western Canada, and Canadian companies got caught in the bidding wars."
For the first time in 5 years, the cost of acquiring proven reserves in Canada exceeded the costs of adding reserves through the drill bit, excluding revisions, among the five Canadian E&P firms, he said. As a result, the Canadian companies' acquisition outlays represented only 30% of total capital expenditures in 2001, down from 46% in 2000 and a 5-year average of 42%.
"Our Canadian E&P study group replaced 207% of its total equivalent production in 2001, vs. 256% in 2000 and a 5-year average of 246%. Companies replaced 153% of their production last year with the drill bit, 12% via upward reserve revisions, and 41% via acquisitions," Morris said.
Capital spending
The five Canadian independents increased their total capital spending by 4% last year, compared with a roughly 30% increase in 2000. Their exploration and development spending was up 34%, while their acquisition outlays for both proven and unproved properties were down 30% in 2001. In 2000, the companies increased E&D spending nearly 60%, while acquisition outlays increased by 5% from the previous year.
"The largest spending increase last year came in the development category, which represented 50% of total capital expenditures in 2001 vs. 38% in 2000 and a 5-year average of 41%," Morris said. "However, this uptick appears to be driven more by the increase in oil field service costs rather than an increase in drilling activity, as the average cost per development well rose nearly 52% while the total number of development wells drilled declined 10% vs. 2000."
Exploration spending accounted for 20% of the companies' total capital expenditures last year, up from 16% in 2000. The number of exploration wells drilled increased nearly 18%, while the average cost for each exploration well was up nearly 8%.
