What is the breakeven price of a play? And what does it take into account, besides land, seismic, drilling and completion costs? What about the time value of money, and lost-opportunity costs if a company had drilled somewhere else or made that acquisition instead?

At least temporarily, the spread between profitability and not has narrowed for nearly all commodities around the world, not just oil and gas, but we think that can't last long-maybe six months at the most.

Meanwhile, Calyon Securities' E&P analyst, Carin Dehne Kiley, recently calculated the Nymex gas price needed to generate a 10% after-tax rate of return (a modest return) in three popular areas attracting lots of rigs today: the U.S. Rockies, Western Canada and the various shale plays.

Assuming a 10% increase in 2005 per-unit F&D costs, operating expenses and overhead to approximate current costs, and adjusting for basis differentials in each region, she found that the Nymex price required in the Rockies is roughly $7.80 per MMBtu, some $7.35 in Canada, and $6.40 in the shale plays (including the Texas Barnett Shale, Oklahoma Woodford and Arkansas Fayetteville).

The equivalent composite spot prices would be $7.30 per MMBtu, $6.85 and $5.90, respectively. Her long-term forecast is $7 per MMBtu.

These numbers are troublesome since the current price on Nymex is below all of them.

But people with long-term plans remain undeterred. Case in point: an Oklahoma landman acquaintance of ours told us that on one fine fall morning recently, some 48 landmen lined up outside the courthouse door in Hughes County, Oklahoma, center of the burgeoning Woodford Shale play, waiting to get in and get going.

Of course, the larger the project and the more long-term the thinking, the less the near-term oil or gas breakeven price matters. "At $4.50 gas, every LNG project we are doing still makes sense. Trinidad makes money at $2.50 because the costs are already sunk," BP's Doug Rothenberg said at the John S. Herold Pacesetters Energy Conference in September. "Stranded gas is a term of the past because there is no stranded gas anymore. It is commercial and it is being developed."

Chinese market demand growth "has completely solidified our LNG market in Japan and Korea," said Woodside Petroleum Ltd. CEO and managing director Don Voelte. That's why the Australian company is now pursuing growth through West Coast LNG markets with its proposed Ocean Way, an LNG regas facility to be positioned 20 miles off Los Angeles on a floating regas and storage ship.

Fellow Aussie producer BHP Billiton also proposes an offshore regas facility, the Cabrillo Port project some 14 miles offshore Ventura County. Following numerous public hearings in southern California over the past two years, BHP's final draft of the environmental impact statement should be filed by the end of this year. A decision by the U.S. Coast Guard, various California state agencies and the governor is expected sometime in 2007.

I wonder how these companies factor in potential political costs that can change the economics--if not the actual breakeven price-in the blink of an eye? It already happened in October, when the new premier of Western Australia announced an intervention in the LNG market there. He ruled that 15% of all LNG production (gas) must now be reserved for domestic energy use (such as power plants) in Western Australia rather than being exported.

The breakeven for the Canadian oil sands is the subject of much discussion also. Canadian Natural Resources plans to be producing 110,000 barrels per day of synthetic crude oil by 2008 from Phase I of its Horizon project, said vice chairman John Langille at the Herold conference.

But cost over-runs in the oil sands are tremendous, and drifting higher. "Unfortunately, we never hear about cost under-runs, so we have spent a great deal of time on the front-end engineering and design [FEED]. Some $4.4 billion of contracts have already been awarded, so we have a high degree of cost certainty on these," he said.

No doubt Shell and ExxonMobil also gave a great deal of thought to the FEEDs for their massive projects offshore Russia's Far East coast, but that's no guarantee. Russia has held up further work on Shell's Sakhalin-II LNG project there, which is already $20 billion over budget, by claiming environmental damages that now must be resolved. And it is threatening ExxonMobil's recently started oil production at Sakhalin-I by disputing the major's claims to all the oil in the production-sharing agreement area, according to analyst Bernard J. Picchi of Wall Street Access.

This is where the breakeven cost gets thrown way off the balance sheet.

These kinds of adventures make it easy to see why some large independents have sold foreign assets and come back to the North American continent, back to low-risk resource plays whose only risk is pipeline capacity. So what's the breakeven on that?

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