What is an oil and gas lease

Excel Spreadsheet Model - 1994-2009 XLS (1,178 KB)


Oil and gas well equipment and operating costs, including coal bed methane costs, stopped their upward trend from the 1990s and fell sharply in 2009. The extremely high oil and gas prices during the first half of 2008 followed by an unprecedented drop to very low prices by the end of the year had a major impact on equipment demand. Operating costs tumbled also because fuel costs were reduced and well servicing rates fell in most areas. The exceptions were in California where electric rates continued to increase, causing a one (1) percent increase in annual operating costs for leases producing from 12,000 feet. Operating cost for coal bed methane wells in the Appalachian and Powder River areas increased because electric rates continued to climb. Due to the timing of the data collection, the cost reported here could be higher than the actual annual average for 2008. However, some production costs (labor and equipment) are not as volatile as drilling, pipe, and other well completion costs, so the effect of the oil and gas prices on collected data may be lessened. Annual average electric rates and natural gas prices are used, which also helps to dampen cost variances.

Gas lease equipment costs increased 8 percent in 2008 and decreased 4 percent in 2009. Gas lease operating costs increased 6 percent in 2008 followed by a 5 percent decrease in 2009. The increase in gas equipment costs was from the increases in the cost of steel items such as safety valves, chokes, separators, and dehydrators.

Oil lease equipment costs were up 17 percent in 2008 and dropped 11 percent in 2009. If tubing costs are excluded, costs increased 11 percent and decreased 3 percent, respectively. The oil lease operating costs rose 6 percent for 2008 and fell 12 percent for 2009. Oil production equipment costs were affected by steel prices which raised the cost for tubulars by 30-40 percent in 2008 and then dropped by as much or more in 2009.

Offshore operating costs decreased by 4 percent in 2009 following the 7 percent increase in 2008. Workover costs increased 20 percent in 2008 and decreased more than 26 percent in 2009.

Coal bed methane operating costs increased 7 percent in 2008, followed by decrease of 1 percent in 2009. Coal bed methane equipment costs were up 16 percent in 2008 but declined 10 percent in 2009. If tubing costs are excluded, equipment costs increased 13 percent for 2008 and declined 6 percent in 2009.

Coal bed methane data is summarized in Tables 23-25 of the accompanying Excel workbook. More detailed data can be seen in Tables N through Q in the workbook. Oil and gas operating and equipping cost changes are graphically shown in Figures 1, 2, and 3, and described in the Summary section below and in Summary Tables 1-22 in the workbook. More detailed data can be found in Tables A through M of the accompanying Excel workbook.


This report, with the accompanying Excel workbook, presents indexes and estimated costs for domestic oil and natural gas equipment and production operations for 2006 through 2009. Indexes only are provided for previous years. Coal bed methane indexes, added in 2002, are also available.

The costs of all equipment and services do not always represent an annual average because of the timing of the data collection and industry cycles. Although mid-year costs are requested, they are not always available. Care should also be used when comparing costs in rapidly decreasing or increasing demand markets (extreme oil and gas price volatility) because the reported costs may be higher or

lower than the actual annual average. Differences between the reported costs and actual annual average costs are likely to be dampened somewhat because some components, such as equipment and labor costs, are not as volatile as drilling rig costs, for example, because there are alternatives such as used equipment or scavenging equipment from marginal wells. Annual electric rates and natural gas prices are used, which also helps to dampen cost volatility.


Figures 1 and 2 show real (1976 dollar) oil and gas prices, and real equipment costs and operating costs indexed to the base year of 1976 for natural gas and oil in the contiguous lower 48 states excluding the Federal offshore Gulf of Mexico. Figure 3 shows separately the real operating cost indexed to 1976 and the real gas price for the offshore Gulf of Mexico platforms. (Real 1976 dollars were calculated using GDP Implicit Price Deflators from Global Insight.)

Figure 1 shows that the real costs of both natural gas equipment and operations have changed less over time than has the real price of natural gas. Real gas equipment costs are 12 percent higher and operating costs are 37 percent higher than for the base year of 1976. The gas price in real 1976 dollars dropped below the record of $2.67 per thousand cubic feet (Mcf) set in 2005 and now rests at $1.20 per Mcf (a 107 percent increase since 1976). In nominal dollars, natural gas prices averaged $6.42 per Mcf in 2006, $6.39 per Mcf in 2007, $8.07 per Mcf for 2008, and only $3.71 per Mcf for 2009. By comparison, the average gas price in nominal dollars in 1976 was $0.58 per Mcf.

Similarly, Figure 2 depicts oil prices in real 1976 dollars, and real equipment and operating costs for oil production indexed to 1976.

First purchaser oil prices averaged $59.60 for 2006, $66.52 for 2007, $94.02 for 2008, and $51.50 for 2009 in current dollars.

In real dollars, the 77 percent increase in oil operating costs from 1976 to 2008 and the 22 percent increase in equipping cost (in real 1976 dollars) are dwarfed by the 274 percent increase in the oil price from 1976 to 2008. The differences are only slightly less dramatic after the 46 percent drop in oil prices in 2009. The 1976 to 2009 change in the real dollar price of oil was 103 percent compared to an equipping cost change of 7 percent (in real 1976 dollars), and an operating cost change of 54 percent.

Figure 3 shows the real oil and gas operating cost indexed to 1976 for Federal offshore Gulf of Mexico platforms. Gas prices for Louisiana in real 1976 dollars were used to represent offshore gas prices. The real gas price changes from 1976 were 391 percent higher in 2008 but fell 54 percent and were only 126 percent higher in 2009. The increase in the real operating cost index that began in 1976 and peaked in 2008 at 219 was primarily caused by a huge increase in the cost for transportation (helicopters and boats) and offshore rigs. The real operating cost index for 2009 went down 5 percent as a result of decreases in costs for transportation and offshore rigs and was only 109 percent higher from 1976 to 2009.


Oil Leases

Tables 1 and 2 contain the 2009 equipment costs and operating costs for a 10-well oil lease for the six regions and the additional costs for secondary recovery in West Texas. Costs for the Federal offshore Gulf of Mexico wells are not included in Tables 1 and 2.

Source: www.eia.gov

Category: Credit

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