The cost of bringing a well into production in the Duvernay Formation in Alberta has varied over time due to technological advancements, operational efficiencies, and fluctuating market conditions. Below is a detailed breakdown of the costs and factors involved, based on available data.
Historical and Current Cost Estimates
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Early Costs (Around 2012): Initial interest in the Duvernay Formation saw high costs, with well development expenses exceeding $20 million per well. These high costs, combined with the global oil price crash in 2014/15, deterred significant investment during this period2.
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Recent Costs (Post-2017): By more recent assessments, well costs have decreased significantly. Reports indicate that current costs to bring a well into production in the Duvernay are around $12 million per well, reflecting improved operational efficiencies and better-than-expected productivity2.
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Cost Reduction Trends: The National Energy Board (NEB) and other analyses have noted a consistent decline in development costs over time. For instance, projections for 2018 assumed a 16% reduction in well costs compared to 2017, driven by increased efficiencies in drilling and completion processes3.
Components of Well Costs
The costs to bring a Duvernay well into production include several key components, as outlined in economic assessments:
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Drilling and Completion Costs: These are the primary capital expenditures, adjusted based on the local depth of the Duvernay Formation. Costs are calculated using Alberta’s Modernized Royalty Framework (MRF) Drilling and Completion Cost Allowance (C*), with adjustments for programs like Alberta’s Emerging Resources Program, which can increase the allowance by 50% to 100% for initial wells in a prospect5.
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Hydraulic Fracturing: A significant portion of the cost is tied to fracturing operations, which are necessary due to the low permeability of the shale. Costs are influenced by factors such as proppant usage (assumed at 600 tonnes per well) and well design, including horizontal leg length (often modeled at 2.5 km for development wells)5.
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Operating Costs: These include ongoing expenses for maintaining production, such as labor, equipment maintenance, and fuel for on-site operations45.
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Shipping Costs: Costs to transport resources to Alberta trading hubs, such as Edmonton for oil and the Nova Inventory Transfer (NIT) for gas, are factored into the total expense45.
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Taxes and Royalties: Corporate income taxes (federal at 15% and provincial at 12%), royalties under Alberta’s framework, and carbon taxes on upstream and midstream emissions (starting at $20/tonne and escalating to $50/tonne over five years) are included in cost calculations5.
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Other Financial Considerations: Costs account for an 8% annual discount rate on future revenues and a required 10% rate of return on investment. Additional expenses, such as carbon taxes on fuel used during drilling (based on 300,000 liters of gasoline per well), are also considered5.
Factors Influencing Costs
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Geological Variability: Well production and costs vary by local geology, with supply costs mapped across the Duvernay basin. Economic resources are more viable in certain areas, such as the north-central and far southeastern parts of the basin for oil, while less economic in the southwest45.
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Technological Improvements: Advances in drilling techniques and increased well performance (e.g., a 20% improvement in production can equate to a similar reduction in supply costs) have driven down costs over time45.
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Market Conditions: Oil and gas prices impact the economic viability of wells. For instance, at 2017 prices of C$60/barrel for light sweet crude and C$2.50/GJ for natural gas, only a portion of resources were economic, but higher projected prices for 2018 (C$70/barrel and C$3.00/GJ) increased the economic resource share34.
In summary, the cost of bringing a Duvernay Formation well into production in Alberta has decreased from over $20 million per well in the early 2010s to approximately $12 million more recently, driven by operational efficiencies and technological advancements. These costs encompass drilling, fracturing, operating, shipping, and various taxes, with variations based on geology and market conditions.
Citations:
- https://www.aer.ca/data-and-performance-reports/statistical-reports/alberta-energy-outlook-st98/reserves/low-permeability-and-shale-area-assessment/low-permeability-and-shale-area-assessment-duvernay-formation
- https://boereport.com/2024/01/24/chevrons-duvernay-sale-seen-attracting-mid-sized-canadian-shale-operators/
- https://energi.media/alberta/economics-albertas-duvernay-shale-neb/
- https://www.cer-rec.gc.ca/en/data-analysis/energy-commodities/crude-oil-petroleum-products/report/archive/2017-duvarnay-economics/index.html
- https://www.cer-rec.gc.ca/en/data-analysis/energy-commodities/crude-oil-petroleum-products/report/archive/2017-duvarnay-economics/2017dvrncnmcs-eng.pdf
- https://www.aer.ca/documents/reports/DuvernayReserves_2016.pdf
- https://www.rec-cer.gc.ca/en/data-analysis/canada-energy-future/2023-modeling-methods/crude-oil/?=undefined&wbdisable=true
- https://boereport.com/2024/11/06/kiwetinohk-reports-third-quarter-2024-results-and-provides-duvernay-and-montney-operations-update/
- https://artisexp.com/wp-content/uploads/2024/07/Artis-Corporate-Presentation-July-31-2024.pdf
- https://www.atha.com/uploads/AOC_2022_Budget_IR_Deck_Dec_2021_FINAL_v2.pdf
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