Petroleum Project Economics Econ210D

Presentation 2

• Geological structure maps

• Well logs

• Core data

• Reservoir fluid sample data

• Reserve estimates

• Production forecasts

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Petroleum Engineering Analysis

Life Cycle of a Hydrocarbon Field

• Exploration

• Appraisal

• Development

• Production

• Abandonment

3

Decline Curve Analysis

• Tool in forecasting production over life of field.

• Decline curves are characterized by three main factors:

1.Initial production rate

2.The curvature of the decline

3.The rate of the decline

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Factors affecting Decline Curve:

• Formation parameters:

Porosity, permeability, thickness, fluid, saturation, viscosities, relative permeability, reservoir size, well spacing, compressibility, producing mechanisms & fracturing.

• Well bore parameters:

Hole diameter, formation damage, lifting mechanism, solution gas, free gas, fluid level, completion interval & mechanical conditions.

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Cash Inflows

• Revenue from selling output (oil and gas)

• Proceeds from sale of assets

• Disposal or salvage value at the end of the

investment

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Revenue

• Production

• Price

PRODUCTION PRICE REVENUE× =

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Cash Outflows

• Operating expenditure – costs which

arise on routine basis and are incurred to

carry out day to day operations

• Capital expenditure – cost of setting up

facilities to enable operations to take

place. These cost are not incurred on a

day to day basis. 9

Expenditure

• Operating Expenditure

• Capital Expenditure

Operating Expenditure

Capital Expenditure

Total Expenditure+ =

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Operating ExpenditureOperating Expenditure – the cost of running

everyday operations:

•Production costs

•Transportation costs

•General and administrative costs

•Maintenance

•Insurance11

Production Costs

• Costs incurred to operate, support and

maintain wells and related equipment and

facilities.

• This includes the cost of workovers

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General and Administrative Costs

These costs include:

• Salaries

• Training

• Office stationary,

• Information technology

• Office rental13

Capital Expenditure

Capital Expenditure includes all costs and

expenditure, which are incurred in carrying out:

•Exploration

•Appraisal

•Development

•Abandonment activities.

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Exploration Expenditures

Exploration costs are incurred to:

Identify areas that may warrant examination

Examine specific areas that are considered to

have prospects of containing oil and gas

reserves, including drilling exploratory wells15

Appraisal Expediture

Appraisal costs are incurred to :

• Carry out stratigraphic tests.

• Drill appraisal wells carried out to determine the

physical extent, reserves and likely production

rate of a field.16

Development Activities

Development costs are incurred to :

• Drill and equip development wells

• Acquire, construct and install production facilities

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Abandonment Expenditure

Also called decommissioning costs are incurred to:

1.Plug and abandon wells

2.Dismantle wellhead, production and transport

facilities

3.Remediate and restore producing areas

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1. Geological & Geophysical Costs: Seismic acquisition, processing and interpretation.

2. Drilling Costs for all wells (producers, injectors, subsea templates)

Rig costs Casing and tubing Drilling fluids Logging & coring Completion treatment Pumping equipment Wellhead assembly

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Capital Expenditure

3. Development costs: Flow lines Separators Treaters Production storage tanks Pipelines Offshore platforms Natural gas cycling and processing plant Compressors Power generation units, Waste disposal system

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Capital Expenditure

4. Abandonment costs - occur at the end of the project.

Comprises of plug costs

site restoration costs which

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Capital Expenditure

Tangible Capital Expenditures

This refers to amounts spent on various

kinds of equipment or physical structures

such as:

• Pipelines,

• Platforms,

• All other Structures and equipment22

Intangible Capital Expenditures

These are intangibles expenses which offer no resale

(salvage) value and includes:

•Seismic costs

•Labour expenses before productions begins

•Drilling rig cost and drilling Chemicals

•Drilling Mud

•Grease etc 23

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The Entire Life Cycle

Net Cashflow

• The net value of Cash Inflows and Cash

Outflows.

• Cash Inflows minus Cash Outflows.

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Key Petroleum Project Parameters

Parameter Fields Estimate

Recoverable Reserves 160 mbo

Field Life 20 years

Oil Price $82 per bbl

Total CAPEX $300 millon

OPEX per bbl $7 per bbl

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Inflation

• Inflation can be defined as a sustained

increase in prices.

• The rate of inflation is stated as a

percentage.

• This represents the rate of changes of prices

between the current and previous year.

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Inflation

• If the inflation rate is 12 percent then this

means that if the price of an item was

$100 last year then the price in the current

year would be $112.

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Inflation

• Since life of field of an oil or gas operation

usually spans a number of years, price

increases are encountered.

• Therefore in the forecasting of costs, inflation

needs to be factored into the estimates.

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Inflation• If production expenses are currently $2.50 per barrel, then

applying an estimated inflation rate of 7 percent over the

next 5 years would give the following estimates.

Year Production Costs per barrel in US$2010 $2.502011 2012 2013 2014 2015

68.2$07.0150.2 1 86.2$07.0150.2 2 06.3$07.0150.2 3 28.3$07.0150.2 4 51.3$07.0150.2 5

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Home Work

• Obtain estimates of all costs relating to the

life cycle of an oil or gas field.

• See slides 11 to 21 for a breakdown of the

items.

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