THE ECONOMICS OF MARKET AREA PRODUCTION

To a company exploring for natural gas, the costs of production include those associated with finding the gas, installing and operating production facilities, and transporting the gas to a trading point at which the gas can be sold. Typical trading points are found at the outlets of processing plants or at downstream locations where major interstate pipelines connect. Therefore, production costs also may include the costs of processing the gas to “pipeline quality” as well as some amount of interstate pipeline service. Meanwhile, the revenue stream can be determined from the expected production profile and the forward price curve at the trading point(s) accessible to the producer. At this point, it may be obvious from the projected costs and revenues that commercial development should be pursued. If not, a second set of costs and revenues should be considered. The underground gas reservoirs may have a “second life” after depletion of the native gas reserves if they can be converted into storage facilities. In a supply basin, significant competing “storage” already exists in the form of un-depleted production reservoirs. However, in a market area, there may be no competing reservoirs, and the alternatives to underground storage (interstate pipeline expansions, LNG, etc.) may be infeasible or quite expensive. Therefore, even if the value of the native gas reserves is low, this second life as a market area storage facility should be analyzed as it may provide the additional net benefits necessary to justify an exploration and development program.