During the past few years the economic environment of the natural gas producing industry has undergone substantial changes. The most spectacular change has been the increase in the price offered for gas, paralleled by steadily increasing industry expectations of higher gas prices in the future. At the same time, there have been substantial increases in royalty, taxes and capital and operating costs.

The cumulative effect of all these changes from 1969 to the present on the attractiveness of investment in developing a marginal Milk River gas reservoir is traced. The economic attractiveness of the example project is shown to have slowly increased from 1969 until early 1974, at which point the introduction of new royalty and tax proposals reduced the attractiveness of the development almost to the level it had been in 1969. Only in the last few months has the industry's profit expectations substantially recovered, so that the example project has again become an attractive investment opportunity.


This paper win examine how the economic attractiveness of an investment in developing an example marginal Milk River gas development project in southeastern Alberta has changed over the period from 1969 to the present. By marginal gas, we mean gas whose physical existence is known, as to both location and depth, but whose development and production is expected to yield only the minimum acceptable rate of return for private investor capital. We have assumed that a private investor would be indifferent to investing in a marginal gas project. he changing economic environment of the past several years has influenced the attractiveness of all potential gas development projects. We have decided to examine a marginal gas project because the effect of changes in the economic parameters is shown dramatically by moving the project into either the "attractive for development" category or the "unattractive for development" category, thus increasing or decreasing reserves, in the sense of economically recoverable gas.

The primary reason for our choice of the Milk River as the marginal gas reservoir was that it is probably the largest known such reservoir in Alberta, in terms of both area and gas in place. As such, it has come under close scrutiny during recent years when it has appeared that it might be on the verge of becoming economic. A considerable volume of data has been built up concerning trends in the anticipated costs of its development and concerning the reservoir characteristics. This data has been utilized in this paper.

In 1969 and earlier, most Milk River gas was not attractive to develop. The major drawbacks to development were the low deliverability per well, caused by the low permeability of the shaley reservoir sand, and low gas prices. These drawbacks were sufficient to outweigh the advantages of relatively low cost exploration and development. Exploration and development costs both benefited from the shallowness and "blanket" nature of the reservoir. Development costs were also aided by the sweet and dry gas. by the gentle surface terrain and by the field's proximity to major transmission pipelines.

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