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Nadine BRET-ROUZAUT and Jean-Pierre FAVENNEC Oil and Gas Exploration and Production Reserves, costs, contracts Third

Nadine BRET-ROUZAUT and Jean-Pierre FAVENNEC

Oil and Gas Exploration and Production

Reserves, costs, contracts

Third edition revised and updated

With contributions by

D. Babusiaux (IFP Energies nouvelles) S. Barreau (IFP Energies nouvelles)

P.R. Bauquis (Total) N. Bret-Rouzaut (IFP Energies nouvelles) A. Chétrit (Total)

P. Copinschi (IFP Energies nouvelles) J.P. Favennec (IFP Energies nouvelles)

R. Festor (Total) E. Feuillet-Midrier (IFP Energies nouvelles) M. Grossin (Total) D. Guirauden (Beicip) V. Lepez (Total) P. Sigonney (Total) M. Valette (Total)

The first edition of this book has been selected for inclusion in Choice’s annual Outstanding Academic titles list. It has been rewarded for its excellence in scholarship and presentation, the significance of its contribution to the field, and its value as important treatment of the subject.

Translated by

Bowne Global Solutions Mr Jonathan PEARSE

2011

Translated by Bowne Global Solutions Mr Jonathan PEARSE 2011 E d i t i o n

Editions TECHNIP 25 rue Ginoux, 75015 PARIS, FRANCE

FROM THE SAME PUBLISHER

The Geopolitics of Energy

J.P. FAVENNEC

The Oil & Gas Engineering Guide

H. BARON

Project Management Guide

M. DUCROS, G. FERNET

Petroleum Refining. Vol. 5: Refinery Operation and Management

J.P. FAVENNEC

Petroleum Economics

J. MASSERON

Manual of Process Economic Evaluation

A. CHAUVEL, G. FOURNIER, C. RAIMBAULT

Translation of

Recherche et production du pétrole et du gaz. Réserves, coûts, contrats / 2 e édition

N. BRET-ROUZAUT, J.P. FAVENNEC

© 2011, Éditions Technip, Paris for the second edition

All rights reserved.

No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechan- ical, including photocopy, recording, or any information storage and retrieval system, without the prior written per- mission of the publisher.

© Editions Technip, Paris, 2011.

ISBN 978-2-7108-0975-3

Printed in France

Preface to the first edition It has been a long time since a reference book

Preface to the first edition

Preface to the first edition It has been a long time since a reference book on

It has been a long time since a reference book on the exploration and production of oil and gas was last published. This book therefore meets a genuine need: to explain to a well- informed readership (teachers, students, researchers, journalists, engineers, industrial and political decision-makers) the key activities of this sector so vital to the world economy both now and in the future. It also provides essential information for the public at large on the relationships between energy and the environment, which involve many complex issues and stir public debate. This book stresses the economic aspect of petroleum activities and provides a solid under- standing of the technical and contractual issues which underpin relations between the petroleum industry and the producing countries, a wise choice since the economics of the sector cannot be understood without a solid grounding in the technical, legal and political aspects.

I should like to pay tribute to the IFP and the IFP School for having taken the initiative

to compile this book, particularly valuable because of two features: it brought together, at

both conception and realisation stages, authors from both the IFP and the Total group, thereby linking the visions of a large research institute and a commercial petroleum group, and it features authors of varied backgrounds and ages, including young engineers as well as recognised academic and industrial experts.

The book therefore sets a fine example in our rapidly changing world, and should be instrumental in attracting new talents to a sector which will remain exciting and vital for at least the next 50 years and probably longer.

I hope this book is rewarded with the success it deserves.

V

Thierry Desmarest

Chairman

Total

Glossary Arbitrage Financial operation which seeks to exploit geographical or temporal price differences. Arbitrage

Glossary

Glossary Arbitrage Financial operation which seeks to exploit geographical or temporal price differences. Arbitrage

Arbitrage Financial operation which seeks to exploit geographical or temporal price differences. Arbitrage operations tend to reduce price differences and stabilise markets.

Bonus Fixed sum payable by the holder of exploration and production rights to the state. There are three types of bonus: signature bonus, payable when the contract is signed, discovery bonus, payable when the discovery of a commercially viable field of hydrocarbons is announced and production bonus payable when certain production thresholds are exceeded.

Brent A crude oil produced in the North Sea. Brent prices (both physical and paper prices) and the associated quotations serve as a reference in Europe and many other regions for deter- mining the prices of other crudes.

Broker Intermediary in the purchase or sale of crude oil and other petroleum products.

Calcimetry Measure of carbonate content.

Cash flow Receipts (cash in) less disbursements (cash out).

Casing Piping cemented into the internal wall of a well in order to maintain it.

CIF (Cost, insurance, freight) sea freight to the destination port.

Club of Rome

natural resources due to over – rapid economic growth.

Commercial discovery A discovery of hydrocarbons the commercial potential of which has been demonstrated by an operator based on technical, economic, contractual and fiscal parameters. A discovery cannot be developed and exploited until it has been declared commercial.

Completion The operation of deploying production equipment in an oil well.

Concession An arrangement by which the state grants the exploration and production rights within a given zone to the concessionaire who, in the case of commercial production, becomes the beneficial owner of the entire production in exchange for payment of the appro- priate taxes (essentially a royalty on production and a tax on profits). The term also means, in some countries, the legal title to mineral hydrocarbons authorising exploitation, or in some countries, the contract associated with this mineral title.

Think tank in the 1970s renowned for publicising the risks of depletion of

Cost of crude oil or product which includes insurance and

299

Glossary

Consolidated profit Accumulated net profit/loss, both national and international, of the parent company and all its branches and subsidiaries in which it holds a significant share of the voting rights.

Constant money

a reference year.

Conventional hydrocarbons Hydrocarbons which can be produced by “conventional” methods and have standard characteristics in terms of viscosity, density, etc. Conventional oils are supposed to be between 10 and 45° API in gravity.

Coring

a special tool – a core barrel – in a probe.

Cost oil In a Production Sharing Contract the fraction of the production allocated to recover the contractor’s costs (capital and operating costs).

Current money Monetary unit applying in the year under consideration.

Day rate contract Type of contract made between an oil company and a petroleum industry service company by which the former controls the operations and the contractor receives a fixed daily remuneration.

Delineation

a structure under exploration, the subsequent drilling programme which allows the poten-

tially productive formations to be defined and delimited.

Derivatives On futures markets a distinction is made between contracts (firm commitments to buy or sell a quantity of crude or a product) and derivatives: options, swaps,… Many derivatives are OTC (over the counter) transactions —carried out between two parties by mutual agreement, without the intercession of an organised market.

Derrick Tower like lattice structure in the form of a truncated, elongated pyramid. In drilling equipment a derrick is used for hoisting and lowering.

Development costs Costs associated with the drilling of the production wells (and if applicable the injection wells), the construction of the surface facilities (collection network, separation and processing plant, storage tanks, pumping and metering equipment) and transport infrastructure (pipelines, loading terminals).

Diesel oil (diesel) Fuel used by diesel engines.

Discount factor

comparable. The discount factor for year n relative to year 0 is 1/(1 + i) n (where i is the discount rate).

Discount rate Cost of capital (effective cost or opportunity cost), the internal rate at which the financial department requires remuneration from departments responsible for investment projects. A company usually defines the effective cost of capital as the weighted average cost of finance from different sources (assuming the capital to debt ratio is given). When capital is rationed, the discount rate may be higher than the average effective cost of capital to reflect a scarcity premium.

Discounted value See Net present value.

Discounting

diture in a number of years as on the same sum now. Discounting consists of applying a given

Operation involving taking a cylindrical sample of rock, carried out by means of

Notional monetary unit based on the purchasing power of the money in

After preliminary drilling has demonstrated the presence of hydrocarbons in

Factor applied to cash flows occurring at different dates to render them

A decision maker does not place the same value on a given receipt or expen-

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Glossary

annual rate (this rate is specific to the company) to future receipts and expenditures to estimate their present value. Discounting tends to reduce the importance of future cash flows.

Dubai Reference crude for trade East of the Suez Canal.

Economic rent

technical costs (capital and operating costs), before tax.

Equivalent cost When the equivalent cost (annual or unit) can be assumed stable over time, we have:

The difference between the value of production (gross revenue) and the

Equivalent annual cost: the annuity equivalent to the discounted capital and operating expenditure.

Equivalent unit cost: the ratio of the total discounted expenditure to the total discounted production.

Exploration costs Costs incurred before the discovery of a field, including costs related to the seismic/geophysical programme, the geological and geophysical interpretation, the exploration drilling including the test wells.

Extra heavy crude Very heavy crude (specific gravity greater than 1, so API less than 10°), found particularly in Venezuela in the Orinoco basin. The Orinoco crude is a non conventional one since, before use, it needs a special treatment to make it suitable for processing in a traditional refinery

Field A field can be defined as a receptacle comprising a permeable rock reservoir sealed by a cap made of impermeable rock and a favourable subsoil configuration referred to as a trap. There are different types of trap, including structural traps, stratigraphic traps and mixed traps.

Fiscal regime or Taxation system

determine how the oil profits are shared between the state and the holder of exploration and production rights

FOB (free on board) The FOB price is the price of a crude oil or of a product when loaded onto a ship at the port of embarkation. In principle at any given time there is only one FOB price for a port (Ras Tanura for Arabian Light, Sullom Voe for Brent, Bonny for the Nigerian crude of that name) whereas there are as many CIF —see CIF— prices as there are desti- nation ports.

Foot rate contract Type of contract signed between a petroleum industry service company and an oil company where the latter controls the operations and the former is remu- nerated according to some measurable unit of activity (for example per metre drilled in the case of a drilling company).

Full cost method Accounting method defined by SFAS 19 and applying to exploration and production expenditure. All expenditures (exploration and development) are capitalised.

Futures markets Financial markets on which normalised contracts for crude or petroleum products are exchanged. They meet the needs of operators to protect themselves or exploit price fluctuations using hedging, arbitrage and speculation. Physical deliveries account for only a small part of the transactions effected on futures markets. Orders are transmitted by a broker and the security of operations is guaranteed by means of deposits to a clearing house. The main markets are the NYMEX (New York) the ICE (London) and the SIMEX (Singapore).

Gas cap

top of the structure.

Gas already separated from the oil in an oilfield, most often situated close to the

The totality of fiscal and contractual conditions which

301

Glossary

Production process involving gas injection which serves to emulsify and lighten

the oil column.

Gas oil A petroleum cut which can be used for diesel oil or heating oil manufacturing

Gearing Ratio of debt to equity.

Geneva Agreements

which provided for an increase in oil prices to allow for the devaluation of the dollar.

GOSP (government official selling price) Between the first oil shock (1973) and the beginning of the eighties, the prices of the various crude oils —GOSP— were fixed by the OPEC governments. These prices replaced posted prices.

Government take

The total revenues accruing to the government including the earnings

Agreements (signed in 1972) between OPEC and the oil companies

Gas lift

of the national oil company. It can be expressed as a percentage of the economic rent, and measures the severity (from the investor’s point of view) of the fiscal regime.

Heating oil

Petroleum product used for space heating in residential and commercial

buildings.

Heavy fuel oil Fuel used by heavy industry, power stations and marine shipping.

Hydrocarbon tenement Legal document, often in the form of a decree, which assigns exploration rights (exploration licence) or production rights (production licence or concession) to a party.

IFP (now IFP Energies nouvelles) French Petroleum Institute, a scientific institute devoted to research, training and documentation, founded in 1944, from which has emerged an extensive structure of companies and consultancy services.

Internal rate of return (IRR) Discount rate at which the net present value of a project is nil. When unique, this is the maximum rate for which the project revenues allow the invested capital to be remunerated without the project going into deficit. In this case a project for which the IRR is greater than the discount rate has a positive net present value. On the other hand in choosing between several competing projects, it is not necessarily that with the highest IRR which is the best (highest net present value is a better criterion).

Jet fuel

Fuel used by aircraft powered by turbines.

Kerosene Petroleum product from distillation which can be used for lighting or as jet fuel.

Logging while drilling (LWD) Technique consisting of recording, at the bottom of the well during drilling, by means of sensors deployed in the drilling equipment, physical parameters which allow the nature of the formations, their pressure regimes and the fluids of which they are composed to be characterised.

Logging

geological formations.

The recording of certain electrical, acoustic and radioactive characteristics of

Migration

A physical process in which hydrocarbons move from a source rock to a

reservoir.

Monte Carlo

Simulation method used, in particular, to determine the probability distrib-

ution function of a variable (e.g. net present value) which is a function of other variables with given probability distribution functions.

302

Glossary

Mud logging

of samples, data and information, making use of the mud circuit.

National oil company

majority holding, to which the government delegates the role of supervising oil operations and managing that part of the production accruing to the state where applicable.

Net present value (NPV) The sum of the present values of the cash flows associated with a project. An investment project with a positive NPV will repay the investment giving a return equal to the discount rate and produce a surplus whose present value is equal to the NPV.

Netback The netback value of a crude is equal to the value of the products obtained from its processing less refining and transport costs. The netback value of a crude can be compared with its FOB price. If the netback value exceeds the FOB price the refiner will make a profit, otherwise he will make a loss.

Nominal value Value expressed in current money.

Non conventional hydrocarbons These are hydrocarbons which, unlike conventional hydrocarbons, are difficult and costly to produce, and whose physical characteristics and geographical situation are exceptional. Non conventional oils include extra heavy oil (from Orinoco) and tar sands (from Athabasca – Canada) which both need a special processing before treatment in traditional refineries. Non conventional oil includes also ultra deep offshore fields.

Offshore Refers to any exploration or production activity at sea, in contrast with onshore activities. The term “ultradeep offshore” refers to petroleum activities carried out at great depth.

Oil quotas In 1982 the OPEC countries established quotas, or production ceilings, as a means of regulating prices. Since that date, each OPEC member state has had to remain within a production ceiling, adjusted periodically in the light of market conditions.

Oil sands Very heavy crude oil of specific gravity around 1 (or 10° API), close to tar, in sand reservoirs. There are very large deposits of tar sands in Athabasca, Canada. The production of oil from these sands is currently being developed.

OPEC Organisation of petroleum exporting countries, created on 14 September 1960 by Saudi Arabia, Iraq, Iran, Kuwait and Venezuela.

Opening up Many producing countries nationalised their oilfields in the 1970s. Now certain countries are reopening their doors, allowing foreign companies to operate in their territory.

Cash flow excluding flows related to loans used to finance the

Operating cash flow project.

Total expenditure which relates to the operation of a

Operating expenditures (OPEX) production facility.

Options Financial instrument giving the holder the option to buy (call) or sell (put) a contract at a given price until a given date. If the option is not exercised before it expires, the holder’s loss is limited to the price paid, whereas there is no limit to his possible gain. The price of the option represents the market value of the option.

Paraffin Petroleum product used for lighting (also known as kerosene).

Oil company fully owned by the state or in which the state has a

A technique which involves the acquisition and interpretation at the surface

303

Glossary

Petrol (gasoline–US) Fuel used by spark–ignition engines.

Petroleum price shock

the “first price shock” of 1973 and the “second price shock” of 1979 – 1981.

Petroleum system Designates the interplay of the geochemical, geological and physical parameters, the processes and the genetically related hydrocarbons which lead to seepage and accumulations of hydrocarbons originating from a given source rock.

Production plateau See production profile.

Production profile

Early in the production phase there is a steep build up in production, after which there is usually a period of stable production (plateau) followed by a progressive decline.

Production Sharing Contract Arrangement by which exploration and production rights in a given zone are granted by the state to a contractor who, in the event of commercial production, can recover his costs from a part of the production (cost oil) and obtain a return on part of the remaining production (profit oil), the balance accruing to the state.

The way the production level of an oil or gasfield varies over time.

Term used to describe a large increase in oil prices, particularly

Profit oil In a Production Sharing Contract, that part of production remaining after the cost oil. This part is shared between the contractor and the state on the terms agreed in the contract.

R/P Ratio of remaining reserves to annual production (expressed in years).

Real value Value corrected for inflation, expressed in constant money.

Recovery rate Ratio of reserves to resources. Recovery rate is between 5 and 80 % for crude oil depending upon field and oil characteristics. Average value (for crude oil) is around 35 %. For natural gas recovery rate is around 80 %.

Red line Line drawn on the map of the Middle East in 1928 in discussions between the partners in the Iraq Petroleum Company. This line marked a region within which the partner companies in the IPC were obliged to act in concert.

Reserves

There are many definitions of hydrocarbon reserves. The reader is referred to the

index, which cross references these various definitions. In general when the term “reserves”

is used as such, it is synonymous with the term “proven reserves”.

Resources Total quantity of hydrocarbons physically present in the ground.

Riser Pipe connecting the seafloor with the surface during submarine drilling.

Royalties Under a concession system, the owner of land mineral rights (generally the state)

grants an operator the right to produce oil in exchange for the payment of royalties equal to

a percentage of the crude price. This royalty, often fixed at 12.5% of the crude price, can vary depending on the price of the crude and the characteristics of the field.

SEC Securities and Exchange Commission.

Seismic reflection Seismic prospecting technique in which seismic waves caused by explosions are reflected by the subsoil strata.

Sensitivity analysis Analysis of the impact on the profitability of a project of possible vari- ations in the different project parameters (e.g. investment costs, selling price, etc.).

SFAS 69

Amendment defining how exploration and production costs should be dealt with.

Companies may choose between the successful efforts and the full costs methods.

304

Glossary

SFAS Statement of Financial Accounting Standards.

Spot market A market in which deals are struck on the day itself, with prices being fixed at the time. The products traded are physical cargoes of crude and refined products. There is no official record of transactions effected between operators, but estimates are published by specialised journals such as Platt’s. There are spot price estimates for both crudes and for the principal products for the main consuming and refining regions: Rotterdam or North West Europe, the Mediterranean, the Gulf, Singapore, the Caribbean, the U.S. The spot price of the main crudes (Brent, WTI, Dubaï) act as indicators of crude prices and as reference price in certain indexation clauses. There is also a spot market for vessel charter.

Spot See Spot market.

State participation Contractual provision by which the state has the option to participate in the contract in partnership with the contractor, to the extent of its participation.

Success rate Ratio of non–dry wells drilled to the total number drilled.

Successful efforts method The accounting method defined in SFAS 19 applying to the expenditure associated with exploration and production. The costs of the geology geophysics and unsuccessful exploration are expensed.

Swaps A type of “paper” contract in which the difference is bought between its values quoted on the spot and forward markets. This instrument allows oil companies to make sales to their customers for delivery several months hence (up to one year) at a guaranteed fixed price.

Tax

but also a tax on profits.

Technical cost Total costs : exploration + development + production costs

In a concessionary system, the operator pays the owner of the field not only royalties

Teheran Agreements Agreements (signed in 1971) between OPEC and the oil companies which provided for programmed increases in oil prices for the Gulf producers.

Traders Persons who buy and sell commodities, currencies or financial instruments. Unlike

a broker, whose function is merely to act as an intermediary between a buyer and a seller,

traders buy and sell cargoes on their own account and therefore are exposed to significant risk. A petroleum trader may be attached to a producing country, belong to an oil company or a financial group or be an independent. See also Broker.

Trading Buying and selling.

Tripoli Agreements

which provided for programmed increases in the price of oil available in the Mediterranean.

Turnkey contract, firm price contract Type of contract made between an oil company and a petroleum industry service company. Unlike a cost reimbursement contract or a contract based on a work specification, the contractor is responsible for the operations and is paid for services rendered (a drilling project, for example) at a contractually agreed overall price.

Unitisation

over several contractual zones exploited by different operators.

Contractual clause providing for the unified operations for a field extending

Agreements (signed in 1971) between OPEC and the oil companies

Uplift Device equivalent to an investment credit authorising the holder of production

rights to write off (in the case of a concession) or recover (in the case of shared production)

a sum in excess of the actual investments.

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Glossary

Wire line logging A technique which involves using sensors lowered on the end of an electric cable to record physical parameters such that the nature of the formations, their pressure regimes, the fluids of which they are composed can be characterised.

Reference crude in the U.S., on both the spot and NYMEX

WTI (West Texas Intermediate) markets.

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Table of contents P r e f a c e t o t h e

Table of contents

Table of contents P r e f a c e t o t h e f

Preface

to

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first

edition

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V

Foreword to the third edition

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VII

Petroleum: a strategic product. . . . . . . . . . . . . . .

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1

1.1 Uses, importance, future

 

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1

 

1.1.1 Uses of petroleum through the centuries

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1

1.1.2 The importance of oil

 

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4

1.2 Historical

background

 

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5

 

1.2.1 The large oil companies up until the First World War, early competition

 

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1.2.2 Between

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wars: the role of the state

 

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14

1.2.3 Between the wars (2): cooperation and competition between oil

 

companies.

The example of the Turkish

 

Petroleum Company

 

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1.2.4 After WWII: increasing oil consumption, new oil companies, creation and development of OPEC

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20

1.2.5 Weakening of OPEC and fall in prices

 

31

1.2.6 1990s: market forces

The

 

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36

1.2.7 twenty first century: sustained high prices

The

 

37

1.3 The oil market and the oil price

 

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44

 

1.3.1 Physical parameters which affect the price of crude oil

 

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1.3.2 Mechanisms for setting the price of crude: history

 

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45

1.3.3 Economic analysis of price formation

 

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51

1.4 Conclusion

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60

Oiland gas exploration and production . . . . . . . . . .

and

gas exploration

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production

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61

2.1

How

hydrocarbons are

formed

 

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61

2.1.1 Sedimentary basins

 

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61

2.1.2 Petroleum

geology

 

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63

Petroleum

2.1.3 .

system

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65

IX

Table of contents

3
3

2.2 Exploration for

hydrocarbons

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65

2.2.1 Prospecting

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65

2.2.2 Geology

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