1

Oil and Gas Industries Oil and Gas Industries

Delivered to:

Bill PykeHilbre Consulting Limited,

October 2012

Oil and Gas Development and Production

2

OutlineOutline

• Offshore Developments

• Producing oil and gas wells and surface facilities

• Transportation; pipelines and tankers

• The cost of production

3

Exploration & Production SequenceExploration & Production Sequence

Application & Award of Permit - Licencing

Exploration – Prospect Identification

Exploration – Exploration Drilling

Appraisal of Discovery - reduce the uncertainties

Development – FEED studies design & build surface facilities, devt drilling

Production

$m.

1-20

1-3

2-15+

100-1000’s

0-10+Yrs

0+

1

1+

1-3

1-4

10+

4

Funds flow in Upstream OperationsFunds flow in Upstream Operations

Exploration

Development

Operating

Tax & Royalty

Allowances

NetRevenue

GrossRevenues

5

The Progress from Discovery to DevelopmentThe Progress from Discovery to Development

• The exploration phase involves drilling of discovery wells.

• The additional wells are referred to as appraisal or delineation wells. They are required to provide more information on the size, shape and petroleum volumes in the field.

• On declaration of a commercial discovery, a plan of development is put in place. The type of development depends costs, environmental conditions and prevailing legislation.

6

Drilling in Offshore Oil and Gas FieldsDrilling in Offshore Oil and Gas Fields

• The early discoveries of oilfields were made in The United States and Baku in the Caspian region in the later parts of the 19th century. These operations entailed the drilling of a large number of closely-spaced wells.

• In the earlier part of the twentieth century the oilfields in Oklahoma and West Texas were developed by so-called pattern drilling in which the producing wells were sited on an acre spacing grid.

• The evolution of improved reservoir management techniques and improving technology led to fewer wells being required. These wells were drilled from centralised surface gathering facilities. The technique of deviating wells enabled drillers to ‘steer’ their wells to designated subsurface target locations.

7

7

Drilling Technology 1925Drilling Technology 1925

Drilling in Oklahoma in the 1920s

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Offshore Development OptionsOffshore Development Options

Source: Natural History Museum /UKOOA

9

Deep Water Fixed Steel JacketsDeep Water Fixed Steel Jackets

Deepwater Jackets similar to the one abovehave been used to develop reserves in water depths in the range of 250-350metres in the Gulf of Mexico

10

North Sea Oil Production PlatformNorth Sea Oil Production Platform

Flare Boom

Drilling Rig

Oil risers

Helideck

Accommodation

Modules

11

Production Wells:

Development With Deviated Drilling Programme

Source: Britain’s Offshore Oil and Gas, UKOOA/ Natural History Museum(1997)

12

A generic North Sea field area overlain on a central

London map

Source: Britain’s Offshore Oil and Gas, UKOOA/ Natural History Museum(1997)

13

Floating SystemsFloating Systems

Source: Total

14

Onshore ProductionOnshore Production

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Oil & Gas Recovery

Concepts

Oil & Gas Recovery

Concepts

• Oil/Gas occupies pore spaces in sedimentary rock

• Extraction leads to voidage replacement by water

(below the oil horizon) in the oilfield or gas (above the

oil horizon) in the oilfield

• Natural oilfield recoveries are referred to as primary

recovery and are dependent on the energy and

physical conditions in the oilfield. Recoveries range

from 10-35%.

• Water and/or gas injection can increase recoveries

and known as secondary recovery

• Natural gas recoveries are commonly much higher

than oil; 70-85%

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RecoveryRecovery

Recovery influenced by:-

• Natural reservoir conditions: porosity and permeability

• Nature of the petroleum fluids: oil, gas, NGLs and condensate

• Prevalent economic conditions: costs and prices

• Location of oil/gas field

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Recovery (2)- Global FiguresRecovery (2)- Global Figures

• Oil resource/endowment 11 trillion barrels (11x1012 barrels)

• Proven Reserves 1.4 trillion barrels (1.4x 1012 barrels)

• Historic Global Recovery factor 11%, 89% still in the ground!

• Current global-averaged field recovery factor 22%

• Improved/enhanced recovery could get to 70% recovery

• Each 1% improvement yields 100billion barrels which is

5 years global supply

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Behaviour of Reservoir Fluids in ProductionBehaviour of Reservoir Fluids in Production

• Oil and Gas fields in production lead to changes in pressures, volumes and fluid content of the period of production

• Many fields have good natural recoveries based on high original pressures in the reservoir. A good aquifer provides support

• Recovery of petroleum volumes (reserves) can often be enhanced

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October 2012

Primary Recovery Primary Recovery

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The Natural Drive Mechanisms for Recovery (1)The Natural Drive Mechanisms for Recovery (1)

Bottom and Edge Water Drive

The aquifer system underlying the hydrocarbon accumulationprovides the energy for driving hydrocarbons to the well bore.

Combination Drive

Both the aquifer and free gas both provide the energy to drivehydrocarbons to the well bore.

Edge drive

Bottom drive

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The Natural Drive Mechanisms for Recovery (II)The Natural Drive Mechanisms for Recovery (II)

Gas Cap Drive

This type of Reservoir has no aquifer system. It consists of asaturated oil with a gas cap. A free gas phase is in equilibriumwith the oil Acting like a piston the expanding gas cap drivesdown into the Reservoir sustaining the production rates of theoil wells.

Gas Cap Drive

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Porosity and Permeability

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Reservoir Pressure Trends for

Reservoirs Under Various Drives

Reservoir Pressure Trends for

Reservoirs Under Various Drives

20 40 60 20 40 60

Oil Production - % of Original Oil-in-PlaceOil Production - % of Original Oil-in-Place

Res

ervo

ir P

ress

ure

- %

of

Ori

gin

alR

eser

voir

Pre

ssu

re -

% o

f O

rig

inal

8080

4040

100100

6060

2020

00

Water DriveWater Drive

Gas Cap DriveGas Cap Drive

DissolvedGas DriveDissolvedGas Drive

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October 2012

Secondary Recovery Secondary Recovery

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Secondary Recovery

Source: Technip

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Example: Ghawar Oilfield, Saudi ArabiaExample: Ghawar Oilfield, Saudi Arabia

Source: Saudi Aramco

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Improvements with Secondary Recovery

Handil Oilfield, Indonesia

Improvements with Secondary Recovery

Handil Oilfield, Indonesia

BPMigas, 2006

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Recovery Targets for the Major North Sea Operators

Recovery Targets for the Major North Sea Operators

0

10

20

30

40

50

60

1978 1995 2005 2010

Per

cent

age

Rec

over

y

38%

45%57%

64%

Historically 38% of in place volumes was considered a typical North Sea recovery factor.With modern technology and cost efficient methods the recovery factors can approach, and even exceed, 60%.

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October 2012

Enhanced Recovery Enhanced Recovery

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Enhanced Recovery (EOR)Enhanced Recovery (EOR)

Additional energy is often needed to enhance the production rate and ultimate recovery of reserves.Some Examples; Miscible Flood CO2 Miscible Flood WAG Foam+CO2

Thermal Steam Flood Fire Flood Injection Chemical Injection Fracturing

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Thermal Recovery -Steam InjectionThermal Recovery -Steam Injection

• Steam reduces viscosity of heavy oil and improves recovery

• Used in many fields in onshore California, Indonesia

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Steam Injection, IndonesiaSteam Injection, Indonesia

BPMigas, 2006

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Enhancing Recovery- “Fracking”Enhancing Recovery- “Fracking”

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Production Profiles

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Reservesand Production ProfilesReservesand Production Profiles

• Reserves are a stock (inventory) asset

• Production is flow and therefore a revenue stream

• Translating reserves to production involves costs-

capital, operating and transport

• Reserves = Production rate x time

• Ultimate reserves are a function of:-

• Prices

• Costs

• Field characteristics and performance

• Type of petroleum

• Location

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The Recovery Factor and the Production ProfileThe Recovery Factor and the Production Profile

1) Physical Conditions- Drive System- Reservoir Quality- Enhanced Recovery- Reservoir Compartmentation- New Reserves

2) Commercial/Financial Aspects- Market- Transport- Price- Operating Cost

3) Environmental Aspects- Restrictions on production rate- Flaring?

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The Production Decline Curve MethodThe Production Decline Curve Method

From existing history the estimator will use a methodology whichincorporates producing wells, gas lift installation, workovers, effect of the reservoir drive mechanism.

Four types of decline curve generally exist:- Linear- Exponential- Hyperbolic- Harmonic

Most production rate/time graphs have been found to exhibit exponential or hyperbolic decline.

38

Production Profile OptionsP

rod

uct

ion

Time

Plateau Rate

Small Gasfield Profile

Rapid Production

Oilfield Profile

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Baseline Production ProfileBaseline Production Profile

0

1000

2000

3000

4000

5000

6000

7000

8000

Pro

duct

ion

Rat

e B

arre

ls/d

ay

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Year

Baseline Production Profile- Marginal Field

Field Statistics

Estimated Field Reserves 17.2 million barrelsReservoir Agbada Sands

Depth to Prodn. 1500m.Recovery Rate 41%Peak Oil Rate 7,410bopdProdn Decline 15% / year

Wells 3 producers; 2 injectorsSurface Plant Mods Compressor, separation trainCost Reference Year 2003

Project start year 2003Planned Field Life 13

Decomissioning Year 2018

Field Statistics

Estimated Field Reserves 17.2 million barrelsReservoir Agbada Sands

Depth to Prodn. 1500m.Recovery Rate 41%Peak Oil Rate 7,410bopdProdn Decline 15% / year

Wells 3 producers; 2 injectorsSurface Plant Mods Compressor, separation trainCost Reference Year 2003

Project start year 2003Planned Field Life 13

Decomissioning Year 2018

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Cash Flow ProfileCash Flow Profile

-20

-10

0

10

20

30

40

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Years

Rev

enue

$,m

m

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Economic Cut-off Production Rates For Cessation of Production

1000 2000 3000 4000 5000 6000 7000 8000

Days in Production

Pro

du

ctio

n R

ate/

Day

Lo

g S

cale

UKCS FPSO 6000 bopd

Onshore FieldEastern England100 bopd

StripperWell,

Oklahoma

13.65 yrs2.74 yrs

10000

100

100000

1000

10

021.91 yrs

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Categories of Supply Cost

(Global Average in Brackets)

Categories of Supply Cost

(Global Average in Brackets)

• Finding- Exploration: lease costs, exploration &

appraisal wells seismic, overheads ($3-5/bbl)

• Developing- production wells, surface plant, export pipelines ($17/bbl)

• Production-lifting and related operating costs ($8/bbl)

• Transportation and Tariff- export pipeline,

shipping costs ($2/bbl)

• Abandonment: decommissioning costs at the end of production ($2/bbl)

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Global Benchmarks for Supply CostsGlobal Benchmarks for Supply Costs

0

2

4

6

8

10

12 Finding

Develop

Opex

T&T

Abandon

$/boe

44

PipelinesPipelines

45

Forties Pipeline System U.K. North SeaForties Pipeline System U.K. North Sea

Source: BP

46 46

European Oil and Products Pipeline Network

47

BTC PipelineBTC Pipeline

48

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Oil TankersOil Tankers

50

Marine Tankers and Worldscale RatesMarine Tankers and Worldscale Rates

• The world tanker fleet had 4,186 vessels with a carrying capacity of 358,800 dwt.

• 84% of the tanker fleet were owned by independent tanker companies.

• The average age of the fleet was 11.9 years.

• World Scale Freight Index used as a starting point for negotiating costs

• World scale 100's, reflect application of tanker operating cost assumption to the ports and distance/steaming time on route. These “flat rates” appear in US dollars per ton of cargo.

• The freight for a given ship and voyage is normally expressed in a percentage of the published rate and is supposed to reflect the freight market demand at the time of contract

51Source, McQuillan Services, New York, March 2008

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Source Destination Volume

Barrels

Worldscale Rate

Freight Cost

$/barrel

West Africa U.S. Gulf of Mexico

400,000 74 $2.27

West Africa Northern Europe

910,000 74 $1.61

Arabian Gulf

Northern Europe

1,900,000 36 $1.51

Arabian Gulf

Japan 1,750,000 48 $1.60

Source: Drewry Shipping Consultants, February 2009

Comparative Marine Tanker Transportation Costs