Expanding the Usefulness of Unit Supply Cost

Abstract Unit supply cost is a widely used tool in the energy business for providing a one number-unit cost description. For example, controllable costs such as finding costs, development costs and operating costs have traditionally been described in an average cost per unit of reserves format for the oil and gas industry. However using this approach on more specific applications is not always informative. Projects with widely varying controllable parameters can still yield the same unit cost, making comparisons difficult. The application of unit supply cost can be readily expanded by adding a new unit cost component termed Cost of Capital. This element introduces the impacts of timing and return on investment into the supply cost determination through discounting annual costs. The Cost of Capital component adds the ability to represent a projects' unique characteristics, particularly reserves' depletion rate the phasing of development. Introducing the Cost of Capital element into the supply cost analysis provides additional information and improves the likelihood of drawing correct conclusions when comparing and ranking projects. Introduction Unit supply cost is a widely used tool in the energy business for providing a one number-unit cost description. Supply cost reports the unit cost of production by measuring selected components in the total cost picture. For example, controllable costs such as finding costs, development costs and operating costs have traditionally been described in an average cost per unit of reserves format for the oil and gas industry. With this simple measure companies can gauge their performance in comparison to the industry average or they may wish to compare own results to those of similar companies. However using this approach on more specific applications is not always informative. Projects with widely varying controllable parameters can still yield the same unit cost, making comparisons difficult. As well, the method of calculating unit supply cost by simply dividing total costs by total production does not recognize a project's unique characteristics such as reserves depletion rate and the timing or phasing of capital outlays. Definition Unit supply cost is the average payment per unit of output over a period of time that will recover all cost outlays. This can be expressed in algebraic form for the time period t= 1 to t=n as follows in Equation 1: <Equation Available In Full Paper= Thus unit supply cost is the sum of all capital and operating costs over a designated time period divided by the sum of output or production over the same time period. Supply costs are usually calculated without consideration of inflation. Hence all cost outlays are normally presented as constant dollars. Also, production can be described in the form associated with the commodity type (i.e.: oil as barreis or cubic meters; gas as cubic feet or cubic meters). Additionally production can be measured as a common base of equivalent units (i.e.: barrel oil equivalent) which describes all unit supply costs on the same common denominator. Examples of reporting unit supply cost resuits are: