Managing finding and development costs and field operating costs is going to be more important than ever for North American producers in 2007.

"The oscillating energy volatility, coupled with the 34% rise in the exchange rate, indicates that producers need to be specifically focused on managing both finding and development costs as well as field operating costs," says Paul Ziff, chief executive of Calgary-based Ziff Energy Group.

Managing costs in an environment where operating costs have risen significantly during the past five years while well deliverability has declined will be difficult, says Gordon Clarke, Ziff senior associate.

"As a result, management teams must function with enhanced effectiveness to hold costs down and thus extend field life," Clarke says. "The history of the last five years shows that only 3% of fields today operate at a cost less than the average cost of all fields in 2000."

Rising costs and lower productivity, combined with weaker gas prices, are threatening the competitive edge of producers in Western Canada and creating a higher floor for gas prices, says Simon Mauger, manager, gas services. Two of the gas-supply components for new gas in Western Canada, drilling and completions and other finding and development costs, which are defined as facilities, land and seismic, are up 250% since 1995, while operating costs are up 71%.

"These average costs total almost $9 per thousand cubic feet-generally higher than the natural gas price in Alberta over the past three years, and producers will earn a lower return on this new gas," Mauger says.

"In contrast, producers are announcing record profits, which are based on investments made five to 15 years ago, under a much lower cost regime."

The firm expects activity to decrease modestly in Western Canada as a result of high and uncompetitive costs and the increasing maturity of the basin. This lower activity will put downward pressure on costs.

As for gas prices, the largest influence driving them upward is the 5%-per-year growth of demand for gas-fired power generation, says Bill Gwozd, vice president, gas services. "Challenges to maintain constant gas supply from the Gulf of Mexico region and Western Canada implies upward pressures on the gas supply outlook," he says.

"Conversely, the arrival of and growing LNG (liquefied natural gas) outlook, strong producer performance in the U.S. central Rockies region, along with the attachment of both the Canadian Mackenzie Delta and the huge northern Alaska fields by the latter part of the next decade are influences that tend to dampen gas price growth expectations."

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