Petroleum Project

Economics
Econ210D
Presentation 2

Petroleum Engineering
Analysis

Geological structure maps

Well logs
Core data
Reservoir fluid sample data
Reserve estimates
Production forecasts
2

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
4

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.
6

Cash Inflows
Revenue from selling output (oil and gas)
Proceeds from sale of assets
Disposal or salvage value at the end of the
investment

Revenue
Production
Price

PRODUCTION

PRICE

REVENUE

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.

Expenditure
Operating Expenditure
Capital Expenditure

Operating
Expenditure

Capital
Expenditure

Total
Expenditure

10

Operating Expenditure
Operating Expenditure the cost of running
everyday operations:
Production costs
Transportation costs
General and administrative costs
Maintenance
Insurance
11

Production Costs
Costs incurred to operate, support and
maintain wells and related equipment and
facilities.
This includes the cost of workovers

12

General and Administrative

Costs
These costs include:
Salaries
Training
Office stationary,
Information technology
Office rental
13

Capital Expenditure
Capital Expenditure includes all costs and
expenditure, which are incurred in carrying out:
Exploration
Appraisal
Development
Abandonment activities.
14

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 wells
15

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

17

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

18

Capital Expenditure
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
19

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
20

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

Comprises of plug costs

site restoration costs which

21

Tangible Capital Expenditures

This refers to amounts spent on various
kinds of equipment or physical
structures such as:
Pipelines,
Platforms,
All other Structures and equipment
22

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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25

The Entire Life Cycle

26

Net Cashflow
The net value of Cash Inflows and Cash
Outflows.
Cash Inflows minus Cash Outflows.

27

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
28

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.
29

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.

30

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.
31

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
2010
2011
2012
2013
2014
2015

Production Costs per barrel in

US$
1 0.07 1 $2.68
2.50 $2.50

2
2.50 1 0.07 $2.86

3
2.50 1 0.07 $3.06
4
2.50 1 0.07 $3.28
5
2.50 1 0.07 $3.51

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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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