Engineering Economy in Upstream Oil & Gas Field Development: A Concise Appraisal Technique for Investment Decision in Upstream Oil/Gas Projects

286 Pages·2021·12.91 MB·English

by  Menglan Duan, Mac Darlington Uche Onuoha

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Current Natural Sciences M Current Natural Sciences
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ECONOMY ECONOMY
Engineering Economy in Upstream
Oil & Gas Field Development
A Concise Appraisal Technique for Investment
Decision in Upstream Oil/Gas Projects
E
n
Menglan DUAN and Mac Darlington Uche ONUOHA g
i
n
e
The business of upstream oil and gas industry is a complex pro- e
r
cess that involves multidisciplinary participation. Producing in
crude oil and natural gas from the subsurface reservoir rocks g
E
to the point of the selling terminal requires stage by stage pro- c
o Menglan DUAN and Mac Darlington Uche ONUOHA
cesses that costs several hundreds of millions of dollars to the n
o
operating companies. Because of the capital intensive nature of m
upstream investments, every required process is challenged of y
i
its economic impact or benefits it will have on the project’s net n
U
present value (NPV). The techniques applied in determining the p
economics of these processes and their selection criteria are st Engineering Economy in
r
addressed in the book. e
a
m
This book guides the reader through these strategic processes, O Upstream Oil & Gas Field
i
and presents the participants involved in the business of l &
upstream oil and gas prospecting and the conditions that dictate G Development
the field development and investment decisions by investors. a
s
It also reveals the shared interests and relationships that F
i
exist between international oil companies (IOCs) and national e
l
d
oil companies (NOCs) in the exploration and exploitation of D
their hydrocarbon resources and reserves. This text will serve e
v
the purpose of teaching and learning to those in the energy e
l
o
and financial sectors, as the methods, tools, and techniques p
m
discussed throughout the chapters will equip students, tutors,
e
experts, and professionals with the necessary skills and n
t
knowledge of Exploration and Production (E&P) projects and
energy financing and investment. The principles of project
management as it applies in upstream oil/gas projects are
discussed as well. And the criteria for project ranking, selection,
and budgeting which are sine qua non to project financing and
execution are well documented in this book.
ISBN : 978-2-7598-2488-5
www.edpsciences.org
Price: 112 €
a
n
d
Current Natural Sciences M Current Natural Sciences
.D.UM. D
. Oua
nn
u
o
h
a
ECONOMY ECONOMY
Engineering Economy in Upstream
Oil & Gas Field Development
A Concise Appraisal Technique for Investment
Decision in Upstream Oil/Gas Projects
E
n
Menglan DUAN and Mac Darlington Uche ONUOHA g
i
n
e
The business of upstream oil and gas industry is a complex pro- e
r
cess that involves multidisciplinary participation. Producing in
crude oil and natural gas from the subsurface reservoir rocks g
E
to the point of the selling terminal requires stage by stage pro- c
o Menglan DUAN and Mac Darlington Uche ONUOHA
cesses that costs several hundreds of millions of dollars to the n
o
operating companies. Because of the capital intensive nature of m
upstream investments, every required process is challenged of y
i
its economic impact or benefits it will have on the project’s net n
U
present value (NPV). The techniques applied in determining the p
economics of these processes and their selection criteria are st Engineering Economy in
r
addressed in the book. e
a
m
This book guides the reader through these strategic processes, O Upstream Oil & Gas Field
i
and presents the participants involved in the business of l &
upstream oil and gas prospecting and the conditions that dictate G Development
the field development and investment decisions by investors. a
s
It also reveals the shared interests and relationships that F
i
exist between international oil companies (IOCs) and national e
l
d
oil companies (NOCs) in the exploration and exploitation of D
their hydrocarbon resources and reserves. This text will serve e
v
the purpose of teaching and learning to those in the energy e
l
o
and financial sectors, as the methods, tools, and techniques p
m
discussed throughout the chapters will equip students, tutors,
e
experts, and professionals with the necessary skills and n
t
knowledge of Exploration and Production (E&P) projects and
energy financing and investment. The principles of project
management as it applies in upstream oil/gas projects are
discussed as well. And the criteria for project ranking, selection,
and budgeting which are sine qua non to project financing and
execution are well documented in this book.
ISBN : 978-2-7598-2488-5
www.edpsciences.org
Current Natural Sciences
Menglan DUAN and
Mac Darlington Uche ONUOHA
Engineering
Economy in
Upstream Oil & Gas
Field Development
A Concise Appraisal Technique for Investment
Decision in Upstream Oil/Gas Projects
Printed in France
EDP Sciences – ISBN(print): 978-2-7598-2488-5 – ISBN(ebook): 978-2-7598-2501-1
DOI: 10.1051/978-2-7598-2488-5
Allrightsrelativetotranslation,adaptationandreproductionbyanymeanswhatsoever
arereserved,worldwide.Inaccordancewiththetermsofparagraphs2and3ofArticle41
of the French Act dated March 11, 1957, “copies or reproductions reserved strictly for
private use and not intended for collective use” and, on the other hand, analyses and
short quotations for example or illustrative purposes, are allowed. Otherwise, “any
representation or reproduction – whether in full or in part – without the consent of the
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representation or reproduction, by any means whatsoever, will therefore be deemed an
infringement of copyright punishable under Articles 425 and following of the French
Penal Code.
(cid:1) Science Press, EDP Sciences, 2020
About the Authors
Menglan Duan Collegeof Safety and Ocean Engineering,
China University of Petroleum (Beijing), China
Menglan Duan is the Dean of the College of Safety and
Ocean Engineering, China University of Petroleum, Bei-
jing, and a Professor of solid mechanics and ocean
engineering. Professor Duan is an astute scholar with
international reputation and has published over 400
technical papers including 104 SCI-indexed journal
papers. He has covered a wide range of research areas
and has conducted over 170 projects related to fixed and
mobile platforms, subsea pipelines and risers, subsea
production systems in Artic Mechanics and Offshore Engineering, Subsea Engi-
neering, Fatigue and Failures of Materials and Structures, Dynamics of Offshore
Engineering Structures, Mechanical Behaviour of Materials, and Risk and Reliabil-
ity in Offshore and Ocean Engineering. His other areas of interest include
management and economic analysis of oil/gas projects.
Mac Darlington Uche Onuoha Collegeof Safety and
Ocean Engineering, China University of Petroleum
(Beijing), China
MacDarlingtonUcheOnuohaisanAssistantProfessorof
Solid/Fluid Mechanics and Offshore Oil & Gas Engineer-
ingattheCollegeofSafetyandOceanEngineering,China
University of Petroleum, Beijing. Dr. Onuoha is a young
scholar with strong academic and research accomplish-
ments.Hehasauthored7publicationsintopinternational
journals and conferences covering research areas such as,
Flow Assurance in Deepwater Pipelines and Risers,
IV AbouttheAuthors
Dynamics of Deepwater Riser Structures induced by Internal Severe Slug Loads,
MultiphaseFlowSimulationinPipeline-RiserSystem,FiniteElementModelingand
Analysis (FEM/FEA) of Offshore Structures, and Petroleum Economics and
Feasibility Analysis of Upstream Investment. His research interest focuses on
Fluid-Structure Interactions (FSI) of Subsea Production Systems, Dynamic
Behaviour of Rigid & Flexible Risers, and Computational Fluid Dynamics of
Multiphase Flows in Flowlines-Riser Pipe Systems.
Contents
About the Authors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III
Preface. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII
Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX
CHAPTER 1
Bidding and Petroleum Fiscal Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Concessionary License Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.2 Contractual Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.2.1 Production Sharing Contract (PSC) . . . . . . . . . . . . . . . . . . . . . 8
1.2.2 Service Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.2.3 Joint Venture Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
CHAPTER 2
Exploration & Reserve Estimation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.1 Discovered Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.1.1 Basics of a Petroleum System . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.1.2 Geophysical Methods for Oil & Gas Exploration . . . . . . . . . . . . 22
2.1.3 Volumetric Estimation of Hydrocarbons in Place. . . . . . . . . . . . 37
2.2 Recoverable Resources (Reserves). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
2.2.1 Proved Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
2.2.2 Unproved Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
CHAPTER 3
Appraisal and Field Development Planning. . . . . . . . . . . . . . . . . . . . . . . . . . 51
3.1 Field Appraisal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
3.2 Comprehensive Field Development Data . . . . . . . . . . . . . . . . . . . . . . . 58
3.2.1 Geological and Reserve Data. . . . . . . . . . . . . . . . . . . . . . . . . . . 58
3.2.2 Reservoir Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
3.2.3 Reservoir Simulation and Production Forecast . . . . . . . . . . . . . 82
3.2.4 Drilling Program and Well Completion Design Plan . . . . . . . . . 94
3.2.5 Production Period and Abandonment . . . . . . . . . . . . . . . . . . . . 117
VI Contents
3.3 Technological Requirement & Challenges . . . . . . . . . . . . . . . . . . . . . . . 123
3.4 Safety and Environmental Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
3.5 Production Operation, Workover, and Maintenance Plan . . . . . . . . . . . 124
CHAPTER 4
Economic Analysis of a Typical Upstream Development Project . . . . . . . . . . 151
4.1 Basic Concepts in Economic and Financial Analysis. . . . . . . . . . . . . . . 151
4.1.1 Economic Evaluation Indicators . . . . . . . . . . . . . . . . . . . . . . . . 151
4.1.2 Cash Flow Diagram . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
4.1.3 Discounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177
4.1.4 Time Value of Money and Economic Equivalence . . . . . . . . . . . 179
4.1.5 Depreciation and Salvage Value . . . . . . . . . . . . . . . . . . . . . . . . 196
4.1.6 Taxable Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202
4.2 Case Study-Application of Economic Tools for Upstream
Oil & Gas Project Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
4.2.1 The Case Study (Data Presented Here Are not Real
but Used for Exercise). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
CHAPTER 5
Investment Decision and Project Selection . . . . . . . . . . . . . . . . . . . . . . . . . . 215
5.1 Capital Budgeting and Rationing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
5.2 Project Ranking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216
5.3 Comparison of Project Alternatives . . . . . . . . . . . . . . . . . . . . . . . . . . . 217
5.4 Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225
CHAPTER 6
Project Management in Upstream Oil & Gas Field Development . . . . . . . . . 229
6.1 An Overview of Project Management. . . . . . . . . . . . . . . . . . . . . . . . . . 233
6.2 Process Groups in Project Management . . . . . . . . . . . . . . . . . . . . . . . . 233
6.2.1 Project Initiating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233
6.2.2 Project Planning. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235
6.2.3 Project Executing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238
6.2.4 Project Monitoring and Controlling . . . . . . . . . . . . . . . . . . . . . 239
6.2.5 Project Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240
6.3 Work Breakdown Structure (WBS) . . . . . . . . . . . . . . . . . . . . . . . . . . . 242
6.4 Design Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245
6.5 Project Budgeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245
6.6 Project Risk Plan, Assessment, and Management. . . . . . . . . . . . . . . . . 248
6.7 Role of Project Manager and Team Management . . . . . . . . . . . . . . . . . 253
6.8 Project Quality Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257
Bibliography. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265
Preface
The thought of writing this book came into our minds after discovering there are
little resources that put together comprehensive and step-by-step procedures and
techniquesthatareappliedintheeconomicanalysisofupstreamoil/gasengineering
projects.Thesubjectaddressedinthisbookisanimportantandindispensabletopic
in petroleum engineering, especially in the upstream sector which involves oilfield
development and production planning. The core concept of this piece is not only
meant for the petroleum sector but can also be extended to other sectors where a
thorough economic evaluation is required to be carried out before any investment
decision on a potential project commitment.
EngineeringEconomyinUpstreamOil/GasFieldDevelopmentisabookthatis
selectively designed to serve the purpose of a teaching and learning material for
coursesinpetroleumeconomics,energyfinance,economicanalysis,andlittleinsight
into project management. The book gives an account of all the scenarios and
activities surrounding the business of oil and gas exploration and production in a
given oil producing market. The chapters are presented in a sequential order that
dictates the chronological stages involved between the national oil companies
(NOCs)i.e.thehostgovernmentsandtheinternationaloilcompanies(IOCs)during
theprocessoflicenseacquisition,exploration,anddevelopmentofaleasedoilblock,
in addition to project management and riskanalysis. The synopsis of the methods,
techniques, and theories covered in each of the chapters will also be discussed.
Chapter 1 explains the legal proceedings followed by operators (i.e. IOCs) in
oil-producingcountries(i.e.Hostgovernments)forthepurposeofbeingawardedthe
explorationlicenseofseveralacreageofoilblocks.Thisacquisitionofrightscomesin
differenttermsdependinguponthefiscalregimeofthehostgovernment.Procedures
to be followed in the event of oil discovery are also discussed in this chapter.
DOI: 10.1051/978-2-7598-2488-5.c901
©Science Press,EDPSciences, 2020
VIII Preface
Chapter 2 discusses the techniques and methods employed by exploration
companies when searching for the black gold and the volumetric estimation of the
recoverable quantities of oil (Reserves) in the event of a potential discovery of
hydrocarbon deposits.
Chapter 3 focuses on the positive outcome of oil exploration by providing
technical details and other considerations put forward by prospective investors
(Operating companies or IOCs) during planning and development phases of the
discoveredfield,astheaimoftheauthorsistodrawattentionofreaderstothestage
by stage processes involved in the exploration and exploitation of petroleum
resources by IOCs.
Chapter 4detailstheapplicationofeconomictoolsinevaluatingtheprofitability
andfeasibilityofaproposedprojectwithacontextualanalysisofanupstreamfield
development case study.
Chapter 5 dwells on whether there is any satisfactory outcome of the economic
analysisperformedontheproposedprojectwhichservesasanimportantinputand
valuabledatathatguidedecision-makersinapprovingordisapprovingtheexecution
of the intended project for or against the interest of the company and its share-
holders. It further discusses the concept of project ranking when comparing alter-
native investments that are independent, which helps investors to make a decisive
choice in their project selection.
Chapter 6 introduces slightly, the elements of project management as it relates
to upstream field development projects with the view to enlighten the students on
the multidimensional course of project management.
Ourobjectivesinproducingthispiecearetoinculcateinthemindsofourreaders
the ability and skills they would need in order to effectively conduct economic
analysis and interpretation of results for their upstream and other related oil/gas
engineeringprojects.Thesuccessfulapplicationoftheknowledgegainedinthisbook
will require a strong background of the computational environment such as Excel,
Matlab,Mathcadsoftwareandotherwell-structuredprogramminglanguagesinthe
likes of Visual Basics, Fortran 90, and C/C++. We have endeavoured to provide
sufficient theories, methods, and techniques to help both the instructors and stu-
dents in advancing the teachings and learning of this subject, and we do hope that
this book will achieve the purpose and intentions of its authorship.
Menglan Duan
Mac Darlington Uche Onuoha