COPYRIGHTcloud1.activelearner.com/contentcloud/portals/hosted3/... · 2019. 12. 9. · Petroleum Applications in History According to recorded history, the oil industry began at least

Petroleum Industry – Past to Present

Overview

In addition to fuel, the petroleum industry produces many of the raw materials in the products that we use every day. In this section, you will learn about: Petroleum applications in history. The early modern petroleum industry. Petroleum value chain and industry

segments. Oil and gas companies.

E&P Industry and Asset Life Cycle Core ═════════════════════════════════════════════════════════════════════════

© PetroSkills, LLC. All rights reserved._____________________________________________________________________________________________

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Petroleum Applications in History

According to recorded history, the oil industry began at least 6,000 years ago, in the Middle East and North Africa, where oil accumulated at the surface through natural seep. Because it was readily available, people found uses for this resource, primarily as:

Building materials. Sealants. Medicine. Lubricants. Embalming. Weaponry "Greek Fire".

As the oil available at the surface was consumed, people concluded that it must be flowing from subsurface reservoirs and they dug shallow wells with stone chimneys or walls for support as heavy oil slowly flowed into these wells.

In China, oil was discovered while drilling for salt water (salt water wells were dug by the Chinese in order to obtain brine for preserving food). The Chinese developed bamboo pipelines sealed with oil-soaked linen for transporting fluids. They transported water for agricultural irrigation and community use, and used the natural gas produced from the shallow wells for heating their homes. They used cable tool strings and bamboo casing.

Distillation Techniques – the Forerunner of Modern Refining

Distillation techniques were evident some 2,000 years ago in the Middle East, and used with natural mineral oils for perfume. Eventually, these techniques extended to illumination. In Europe approximately 1,000 years ago, distillation was used to provide oil for illumination from olive oil, whale oil, and surface oil accumulations.



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1600

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The Early Modern Petroleum Industry

Although oil was discovered in 1829 while drilling a water well in Kentucky, the modern petroleum industry did not begin until 1859, when a group of businessmen from New Haven, Connecticut contracted with Col. Edwin A. Drake to drill for oil near Titusville, Pennsylvania. This was the first recorded agreement to purposely seek subsurface hydrocarbons in the U.S. The company, named "Rock Oil", secured capital through the stock exchange. This was the first time Wall Street risked capital to search for oil and gas as a competitor to whale oil for illumination.

With the capital secured, Drake chose a drill site he thought promising because it contained a region of surface oil seeps. Using a cable tool drilling rig, oil was struck at "Drake's Folly" at a depth of 69½ feet (21 meters). Hardly a gusher, the well produced approximately 8 barrels per day (STB/day), with production estimates ranging from 4 to 20 barrels per day (STB/day) (.6 to 3 m3/d). This oil was used primarily for illumination and sealant purposes, but more importantly, was found to be extremely effective as a lubricant for use with rotating machinery.

With Drake's discovery at Titusville, others rushed in, and hundreds of wells were drilled in northwestern Pennsylvania through the balance of the century. The first gusher was drilled in 1861, producing over 3,000 barrels per day (bbl/d) (477 m3/d). It quickly increased to 450,000 bbl/d (71,500 m3/d), and within a year was producing 3 million bbls/d (477,000 m3/d). This abundance caused the oil price to drop from $10 per barrel to 10 cents per barrel, a price that finally displaced coal and whale oil as fuel for lamps.

In the rush to produce this oil, wells were drilled as quickly as possible and in close proximity to each other, with the "Law of Capture" being the predominant principle, or the idea that the driller had to "Pump it quick before your neighbor."



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Industry Pioneers

Many individuals made significant contributions to the modern petroleum industry. Some of these pioneers include:

John D. Rockefeller

As a 31-year old businessman in Cleveland, Ohio, a short distance from Titusville, Rockefeller became interested in Drake's discovery. While visiting the Pennsylvania oil fields, he recognized the potential of this new industry as a source of illuminating oil for Europe, and first became involved in refining. By the end of the century, he controlled of 90% of the industry, including production, transportation, refining, and marketing. With his Standard Oil Company, Rockefeller maintained majority control

of the world industry well into the twentieth century.

Nobel Brothers

In 1875, the Nobel brothers (Ludwig, Alfred, and Robert) began drilling in the Caspian area. By 1882, they designed the first Nobel Refinery, along with Dmitri Mendeleev, the chemist and inventor of the Periodic Table of elements. The Nobel brothers formed a refining company, Branobel, in St. Petersburg, Russia, competing with Rockefeller's Standard Oil Company for market share.



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Pattillo Higgins

Through the 1890’s, Pattillo Higgins studied the geology of surface land features, concluding that the subsurface geology was ideal for the presence of oil at a site near Beaumont, Texas.

His conclusion was based on his observation of a one-mile diameter circular region of land 15 feet (4.5 meters) higher than the surrounding land. He believed that this indicated ideal conditions for the natural presence of oil. Higgins was correct, but although he drilled extensively over this surface dome through the 1890's, he did not drill to sufficient depths and in 1901, he sold significant shares in his operations to Captain Anthony Lucas.

Anthony Lucas

Based on Pattillo Higgins' belief that the area was ideal for finding an oil reservoir, Captain Anthony Lucas drilled the first discovery well using rotary drilling in 1901 at Spindletop, located in Beaumont, Texas in 1901. Rotary drilling was a great improvement over cable tool style drilling. Not only was it faster (the rotary style drill cleared the hole of dirt continuously, rather than the stop and go method required to clear the dirt using the cable tool drill style), but it could also drill much deeper and more safely than cable tool drilling.

He struck oil at a depth just over 1,000 ft (305 m). The well blew out, and production for this first Spindletop well (considered the largest gusher in the history of the oil industry) was estimated at an average of 100,000 barrels per day (STB/day) (16,000 m3/d) over the next 10 days, or a total of about 1 million barrels (160,000 m3/d) in 10 days from a single well.



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In an attempt to save some of this oil flowing under blowout conditions, an earthen dam was constructed around the drilling rig. The dam collected an estimated 500,000 barrels (79,500 m3/d), but this lake of oil ultimately caught on fire and the oil was lost. Not only did the Spindletop discovery ignite the first major oil boom in Texas, but over time this single well increased world production by 20% and U.S. production by 50%.

Henry Ford

Around the end of the 19th and beginning of the 20th centuries, petroleum products began to take hold as a fuel to power engines. In 1895, automobiles competed in the Paris Automobile Race using internal combustion engines. In 1896, Henry Ford introduced his petroleum-fueled Quadricycle, and later began manufacturing internal combustion-fueled automobiles. While the Ford Motor Company was not the only company making automobiles, automobile production increased dramatically with the advent of Ford's "moving assembly line" in 1909. The

effect was twofold: automobiles could be made more quickly and more affordably, which considerably increased demand for fuel products. It wasn't long before other engines were designed to run on petroleum products. In 1912, the British Navy began to switch from coal to fuel oil to power their ships.



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Petroleum Value Chain and Industry Segments

The petroleum industry value chain is a linked set of value-adding activities, ranging from raw materials to final consumer goods. The value chain is divided into Upstream, Midstream, and Downstream segments that represent distinct and separate parts of the process of delivering products to the consumer.



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The Petroleum Value Chain

EXPLORATION

PRODUCTION

GAS PROCESSING REFINING

STORAGE

TRANSPORTATION PETROCHEMICAL

MARKETING/CONSUMER



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OILOIL

GASGAS



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EXPLORATION PRODUCTION

ONSHORE ONSHORE

OFFSHORE OFFSHORE


ONSHORE ONSHORE

OFFSHORE OFFSHORE



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APPRAISAL


ONSHORE ONSHORE

OFFSHORE OFFSHORE


ONSHORE ONSHORE

OFFSHORE OFFSHORE



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EXPLORATION

PRODUCTION MARKETING/CONSUMER

PETROCHEMICAL

REFINING

STORAGE

TRANSPORTATION

GAS PROCESSING



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Petroleum Value Chain and Industry Segment Network

Here is another look at the connections between all the value adding activities in the petroleum value chain:



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Petroleum Value Chain and Industry Segment Network

Here is another look at the connections between all the value adding activities in the petroleum value chain:



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Upstream Segment

The upstream sector is the exploration and production (E&P) side of the petroleum industry, or all of the activities up to the point of metering produced resources into the transportation system. These activities include the geological search for potential oil and gas fields, drilling onshore and offshore exploratory wells, and operating the wells that recover and bring the hydrocarbons to the surface.

Exploration

Exploration involves identifying and prioritizing potential hydrocarbon resource target areas and securing the mineral rights to explore in the target areas through formal agreements (leases or concessions). This also involves drilling initial exploratory well(s). In this stage, the reservoir and its

contents are just beginning to be defined and understood.

Appraisal

Appraisal involves drilling additional wells to define the size of the hydrocarbon resource. The reservoir volume, boundaries, and productivity are evaluated. An appraisal is intended to establish the minimum hydrocarbon volume to justify development. It is followed by a field development plan to show reservoir economics and obtain management approval.

In this stage, the size and extent of the reservoir are delineated.



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Development and Production

Executing the field development plan includes drilling and completing the initial development wells, and installing production facilities and transportation systems. In this stage, the understanding of the reservoir continues to improve and field activity is high. The operator focuses on optimizing

production and enhancing the reservoir to extract the highest percentage of recoverable hydrocarbons.

Mature Production and Decommissioning

As the field approaches its economic limit, enhanced oil recovery techniques are used to extend the life of the field. Once that economic limit is reached, the field will be abandoned by the operator. This process may include disposal of the asset to a lower cost operator who can produce the field at a lower cost, thus pushing the economic limit out.

Abandonment at the economic limit includes well plugging, facility decommissioning, and restoration of the surface and subsurface operating areas. During decommissioning, efforts are made to protect the environment, such as filling sections of the wellbore with cement to isolate the flow path between gas and water zones, as well as from the surface.

For offshore installations, shallow water facilities can be removed completely and reused. Deep water platforms are decommissioned by removing only the upper parts and leaving the remaining structure in place. The removed fragments can be either transported to shore or buried at sea.



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Midstream Segment

The midstream segment commences when custody of the oil and gas is transferred from the producing lease via the lease automatic custody transfer (LACT) unit to begin the process of transportation. It involves hydrocarbon transportation, storage, and oil and gas processing. Produced hydrocarbons are moved from the production facility to a process facility using different transportation modes. Barges and tankers move them across oceans and other large bodies of water. On land, they are moved using pipelines, rail, and trucks.

Details about the specific activities included in the midstream sector are shown below:

Pipelines

Pipelines are an efficient way to transport hydrocarbons from the wellhead to gathering and processing facilities; then to refineries and tanker loading facilities. Natural gas may be piped directly from the production facilities to the customer. Hydrocarbons are collected from field gathering system (pipelines) that move oil from the wellhead to storage tanks and treatment facilities. There it is measured and tested, then moved to a pump or compressor station, where the oil is delivered to the pipeline. Pipelines may have many collection and delivery points along the route. The delivery points may be refineries, where hydrocarbons are processed into products, or shipping terminals, where they are loaded onto tankers.



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A pipeline may carry several types of hydrocarbons. They may also travel through more than one pipeline system as they journey from the oil field to the refinery or shipping port. Pumping stations and compressors along the pipeline ensure smooth and continuous flow.

Pipeline maintenance is critical to ensure environmental safety and a reliable supply to meet consumer demand.

Transportation

From the pipeline, hydrocarbons may need to be transferred or stored for additional processing or distribution. Transportation may involve trucks, rail, barges, or tankers.

Rail transportation can quickly move large amounts of hydrocarbons to terminals.

Marine transportation uses oil and LNG tankers to transport hydrocarbons globally, in addition to transcontinental pipelines.

Storage Facilities

Hydrocarbons are stored in tanks for shipment to other locations for processing into finished products. Different types of tanks used to store petroleum products include:

Floating roof tanks – Used for crude oil, gasoline, and naphthas.

Fixed roof tanks – Used for diesel, kerosene, catalytic cracker feedstock, and residual fuel oil.

Bullet tanks – Used for normal butane, propane, and propylene. Spherical tanks – Used for isobutane and normal butane.

Actual volume is important, as well as a measure of the number of days of supply available. This number reflects the product volume that can be supplied to refineries or the volume of refined products that are available to meet demand.



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Underground Storage

In addition to the above ground storage facilities, underground reservoirs are used to store huge volumes of hydrocarbons including crude oil and natural gas. For natural gas, it is most commonly held in storage in these reservoirs. Three common types of reservoirs used for underground storage are:

Depleted natural gas or oil fields. Salt caverns. Aquifers.

Gas Processing

Raw natural gas processing involves removing water, sulfur, and other impurities from raw gas so that it meets specifications required for sale. In this process, reservoir fluids are first separated by gravity into oil, gas, and water. The water is treated and disposed of; the oil is treated and moved to storage, and eventually transported for sale.

The raw gas must be conditioned and sweetened to remove hydrogen sulfide (H2S) and carbon dioxide (CO2), which is corrosive. (Natural gas with very low H2S content is referred to as "sweet," while products with high H2S content are referred to as "sour".) The sweetened gas is then dehydrated to contract sales gas specifications. During gas processing, valuable natural gas liquids (NGLs) are removed from the gas stream. The gas stream is now ready for transportation or sale, while the natural gas liquids are stabilized to control vapor pressure, treated to remove accumulated impurities, and separated into pure components for sale.



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Downstream Segment

The downstream industry segment involves crude oil refineries, petrochemical, plants and marketing/distribution.

Refining Refineries are large and complex facilities designed to manufacture consumer products, including gasoline, diesel fuel, aviation fuel, liquefied petroleum gas (LPG), kerosene, fuel oil, lubricating oil, solvents, and paraffin wax.

Refining begins with distillation of crude oils into separate hydrocarbon groups. In the distillation process, crude oil enters a distillation (or [fractionation) tower, where products are separated, based on their boiling points.

In another refining process called catalytic cracking, large complex hydrocarbons that cannot be separated through fractionation/distillation are "cracked" into smaller hydrocarbons using heat and catalysts.

Reforming is another refining process using several chemical reactions involving heat, pressure, and a catalyst to reshape or "reform" the hydrocarbon molecules.



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Petrochemicals

Petrochemical products are the second-level products derived from oil and natural gas Feedstock (Petrochemical) for petrochemical manufacturing, including:

Liquids and gases produced by refining processes.

Natural gas liquids from gas processing plants. Natural gas.

They are distinct from fuels that are burned to release energy.

In a petrochemical plant, raw materials and feedstock such as natural gas, ethane, propane, butane, and naphtha, are converted into basic and intermediate petrochemicals, such as methanol, ethylene, propylene, butadiene, benzene, toluene, and xylene. These products are used to manufacture other products such as fertilizers, solvents, paints, plastics, soaps, detergents, drugs, cosmetics, etc.

Petrochemical plants may vary widely in size. A single plant may produce a dozen or more products, while other plants may produce a single product.

Marketing/Distribution

Marketing is the wholesale and retail distribution of the petroleum products from refineries and petrochemical plants to the end consumer. Refined products are transported to consumers such as gasoline service stations via truck, rail, barge or pipeline on a much smaller scale than the crude coming from a well.

Refined products must meet stringent sales specifications. Examples include gasoline or petrol, kerosene, heating fuel, natural gas and LPG, jet fuel, diesel, asphalts, etc.



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Oil and Gas Companies

The activities along the petroleum value chain are performed by either integrated oil companies or those specializing in a single segment of the industry:

Independents – participate primarily in the E&P (upstream) segment.

Refiners and petrochemical companies – participate primarily in the downstream segment.

Integrated Oil Companies

Integrated oil companies are large companies that participate in multiple industry segments. They may be integrated:

Vertically – where the organization is comprised of upstream, midstream and downstream operating divisions across the entire petroleum value chain, from exploration to production, development, refining, marketing, and distribution.

Horizontally – where the organization owns multiple businesses at the same level of the value chain.These may be similar businesses, such as multiple refineries; or different holdings within the energy industry besides its principal one of oil and gas,such as coal deposits, nuclear or solar energy, etc.

Integration helps to spread out a company's risk. By owning multiple ventures along the value chain, a downturn in one aspect of the industry is diluted across the company as a whole. This makes it less susceptible to economic swings when the market price of oil fluctuates.

Independent Oil Companies

Independent oil companies focus on exploration and production (E&P). Like integrated companies, they also have the reserves and the rights to produce them, but their scope encompasses only the E&P, or upstream sector. Profitability may be higher for an independent company when oil prices are high, but likewise be less than an integrated company when oil prices drop.



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IOCs and NOCs

Once a potentially attractive area to drill has been identified, the oil company must obtain the rights to explore and drill there. Subsurface rights can be privately held in the U.S., so subsurface mineral rights are negotiated with the government or private owner. In other parts of the world, however, the government owns all subsurface rights. In those cases, the company must negotiate directly with the host country government or one of its agents, typically a National Oil Company (NOC). National and International oil companies perform different roles:

International Oil Companies (IOCs)

An IOC is a publicly-owned energy company with shares held by stockholders - they risk capital to provide the greatest returns to stockholders. They have the expertise to extract the resources, compete globally, and often partner with National Oil Companies in host countries. In the 1970's, IOCs held most of the world's petroleum reserves. Many of the IOCs were made up of multinational companies formed after the breakup of the Standard Oil Company monopoly, plus European IOCs. The largest of these were referred to as the "[Glossary:Seven Sisters DisplayText="Seven Sisters"]". They dominated the industry, often sharing multiple joint ventures. IOCs bring capital, expertise, and experience to the host country to develop their fields.

There are many international oil companies. A few examples include: BP, Chevron, Royal Dutch Shell, ExxonMobil, PetroChina, Petrobas, Repsol, Total S.A., EcoPetrol, OMV, Sasol, Sinopec, MOL Group, ConocoPhillips and Lukoil.



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National Oil Companies (NOCs)

An NOC is an oil and gas company fully or majority owned by a national government to manage that country's hydrocarbon resources. At the beginning of the twentieth century and at a more accelerated pace during the 1970s, many countries established national or government oil companies (NOCs). NOCs generally operate in a home country, but may also compete globally across multiple sectors. The role of the NOC is to:

1. Ensure the development of oil and gas resources for the maximum benefit of the country.

2. Reduce dependence on the IOCs for their oil supplies. 3. Assure a continuous supply of crude oil production, as well as refining

and marketing at home.

NOCs have a key role in ensuring effective technology transfer and human capital development, and that hydrocarbon reserves are developed in the national interest.

A few examples of the many national oil companies include: Saudi Aramco, Qatar Petroleum, PETRONAS, Sonagas, Nigerian National Petroleum Corporation, Rosneft, Statoil, Korea National Oil Company, Pemex, and Oman Oil Company.



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IOC, NOC, and Host Country Relationships

In the 1970's, IOCs held most of the world's petroleum reserves. As the NOCs sought to manage and obtain the maximum share of their countries' resources, they also began to accumulate capital and expertise, so that host countries and their NOCs now have many of the attributes that previously were the domain of the IOCs. Many NOCs utilize their own and service company expertise to develop their resources, and the extensive capital required for production is accessed directly from world stock markets or internal cash flow.

In many cases, the IOCs have become specialized providers of technology and know-how to host countries. Over time, many leading NOCs have become international in scope and compete with IOCs globally. NOCs now hold the majority of the world's petroleum reserves.

Host countries use different types of agreements with NOCs and IOCs to develop their oil and gas resources:

Concession (or License)

The host country grants the IOC the right to explore, develop, and market petroleum from some specific area of its territory in exchange for royalties and taxes.

Government Participation

The host country and IOC form a joint arrangement or joint venture to explore, develop, and market host country petroleum. The proceeds are split between them according to an agreed contract.

Production Sharing Agreement

The host country or its national oil company (NOC) grants an IOC the right and obligation to explore for and produce oil and gas within a section of its territory. This agreement is in exchange for a portion of production in order to cover its costs and make a profit sufficient to make taking the risk attractive.

Service Agreement The host country or its NOC is responsible for developing its own resources and contracts with an IOC to perform specific services where the host country or NOC may lack expertise.



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Oil Service Companies

Oilfield service companies are contracted by energy companies to find and produce oil and gas. There are numerous service companies. Some examples include: Halliburton, Baker Hughes, Schlumberger and Weatherford. They vary in size, but all compete on price and quality for the products and services they provide.



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Oilfield Service Companies


Products

Resources

Expertise



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Review

In this section, you learned about:

Petroleum applications in history.

The early modern petroleum industry.

Petroleum value chain and industry segments.

Oil and gas companies.



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Exploration, Development, and Production



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Introduction To the Asset Life Cycle

Overview

Exploring for and managing hydrocarbon assets involves many different activities. These activities are divided into segments referred to as the "asset life cycle". In this module, you will learn about the petroleum industry value chain and the exploration and production (E&P) asset life cycle segments, including:

E&P asset life cycle. Exploration. Appraisal. Development and production. Mature production and enhanced oil recovery (EOR).



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E&P Asset Life Cycle

The exploration and production, or “E&P” asset life cycle, follows the progression of each phase that is required to explore for and then produce oil and gas. The exploration phase of the E&P asset life cycle includes exploration and appraisal, which means locating the potential hydrocarbon asset and then establishing its commerciality. The production segment includes first developing the wells and then the facilities, and then producing oil and gas from the asset, from first oil through its maturity, until it reaches its economic limit.

The use of capital changes during the E&P cycle, in the exploration and appraisal stage, we are risking capital to find the asset, in the development stage we are deploying capital to maximize profitability and return. E&P life cycle is technical, economic, or political.



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AppraisalAppraisalExplorationExplorationDevelopment &

ProductionDevelopment &

ProductionMature ProductionMature Production

The E & P Asset Life Cycle

Development & Production

Mature ProductionAppraisalExploration

Exploration and Production Economic Cycle

Each segment of the E&P life cycle is capital-intensive

Each segment involves risk• Technical

• Economic

• Political

This capital intensity and associated risks have a great impacton

• Revenues

• Expenses

• Cash flow

• Associated profits



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Exploration Phase can oftenlast many years, costsignificant capital to search forpossible reserves and developprospective fields.



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Identify potential reserves

Secure the right to explore andthen produce the asset

Seismic and other surface datais gathered

Potential oil fields identified

Exploration team locates anddrills an exploration well




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Exploration and Production Economic Cycle – Appraisal


Create the field development or asset business Plan

Surface facilities design tohandle the produced fluids

Appraisal wells are drilled todetermine

• Horizontal and vertical extent of the field

• Estimated reserves• Production capacity of the

field

Appraisal well



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Appraisal wellAccumulate data

Understand thickness

Area of the reservoir rock

Porosity

Net pay

Ability to store hydrocarbons

Transmit hydrocarbons


Appraisal wellAccumulate data

Determine and mapoil/gas/water fluid contacts

Use formation testingtechniques to determine thetype of oil in the reservoirand its commercial value



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Asset Production Forecast Model



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Exploration and Production Economic Cycle – Mature Production

PlateauPlateau

DeclineDecline

Exploration and Production Economic Cycle – Mature Production

Mature AssetMature Asset

Economic limit

Initially, the objective is to limitthe decline in production of oiland gas that occurs as theinitial energy that was presentin the reservoir to lift oil in thesurface declines.

Later, the economic limit can bepushed out by moving intosecondary and tertiary recoveryto extend production and increase ultimate recovery.



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Exploration

Example: "Our Reservoir" ‐ Exploration

During this course, we refer to "Our Reservoir" to use as the explanation module. It is an anticline structure. The underlying structures were identified using seismic surveys. An exploration well is drilled to confirm the interpretation made at the surface, that oil and gas exist at that point in economic quantities.

In our model, this first exploration well (#1) was a dry hole; only seawater and brine was present in the reservoir quality rock.

However, important information was acquired from the drill cuttings and well logging processes. The knowledge gained from those processes improved understanding of the seismic information and provided a clearer picture of the subsurface.

Using this new information, the exploration team drilled a second well, Exploration Well #2, in an adjacent anticline, this time charged with oil. This second exploration well provides information from subsurface formation evaluation tools to estimate possible reserves.



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Exploration

Asset Economic Cycle: Exploration

In the exploration phase, which may last many years, significant capital is risked to search for possible reserves. The exploration phase is capital-intensive, with no return or revenue in the early years, and with significant geological, technical, economic, and political risk.

Throughout exploration, a number of exploration wells will be drilled, some of which will be successful, some will not. All will help to define the limits of the field, both horizontally and vertically to estimate potential volumes. Based on knowledge derived from the exploration wells, a decision will be made to either abandon the prospect or move to the appraisal phase to assess the asset’s potential cash value and ability to flow oil and gas.



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Mature ProductionMature ProductionDevelopment &


ProductionAppraisalAppraisalExplorationExploration


Exploration Phase

Identify new fields and reserves

Acquiring rights and generatinga prospect

Drilling and evaluation well,evaluating and identifyingpresence of possible reserves

Exploration Phase



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Exploration Phase

Critical to the vitality of allE & P companies

As you produce oil, youdeplete reserves

The reserves that areproduced on a daily basismust be replaced

Exploration Department

Exploration Phase

Exploration Phase

Exploration DepartmentGeologists & Geophysicists

Geoscientists

Business development teams

Other skilled individuals



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Exploration Phase

Exploration Phase

Exploration DepartmentGeologists & GeophysicistsGeoscientists

Identifying possible opportunities

Evaluate risk and assessopportunities

Submit their proposal

Explain where they will locateand drill exploration wells

Reservoir Seal Migration

Source Rock

Organic material in rock issubject:

• Increasing depth of burial

• Geological Time

• Temperatures >104°F(40°C)

• Converted tohydrocarbons

Successful Petroleum Accumulation



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Sedimentary rock;sandstone

• Sufficient porosity

• Permeability

• Store and transmit fluids

Reservoir Rock



Hydrocarbons to beexpulsed and then travel along from the mature source rock to the reservoir.

Migration Path



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Such as shale

Very low permeability

“Traps” migratinghydrocarbons from thereservoir rock

Prevents their movementfrom the reservoir rocktowards the surface.

Reservoir Seal




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Private landowners

State or federal government

Subsurface resources are owned by:

In most of the world, resources are owned by the government

Explore potential resources

Establish legal right to drill

Establish legal right to produce theresources if they are commercial

Mineral rights are acquired to:

Exploration Process includes:

Business development and legal teams who are responsible fornegotiating with the mineral rights holders.



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Exploration Well #1

Exploration Well Goals:• Confirm the presence of the

prospective field determined throughvarious subsurface evaluationtechniques

• Identify the presence or absence ofhydrocarbons in the subsurface

Exploration Well #1

Exploration Geoscientists Identify thebest location for the initial wildcat orexploration well

Drilling department configures themost appropriate, economical, andenvironmentally safe well design toreach designated target depth



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Exploration Well #1

Not all exploration wells aresuccessful

• Today, a success ratio of 1 for every 2wells drilled is common

• Previously, a ratio of 1 to every 25wells drilled was normal

Exploration Well #1

Exploration Well #2



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Mature ProductionMature ProductionDevelopment &


ProductionAppraisalAppraisalExplorationExploration


Exploration AppraisalDevelopment & Production

Mature Production

Exploration wellAppraisal well

Appraisal well’s objective:

Appraise the value ofthe reservoir and itsability to flow oiland/or gas



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Appraisal wells collect data to: Determine Original oil in

place (OOIP)

Estimated oil production inbarrels of oil per day(bopd)

Appraisal information allows characterization of: Reservoir’s size and shape

Rock and fluid properties

Reservoir energy

Anticipated production rates




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Geologist

Geologist

Geological settingand lithology

Geological settingand lithology

Permeability: Ability to transmit fluids

Permeability: Ability to transmit fluids

Porosity: Storage capacity

Porosity: Storage capacity

PORE

PORE

PORE

PORE



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Petrophysicist

Red Shale

Brown Shale

Gray Shale

Samples of drill cuttings under 10X magnification

Petrophysicist

Mud logging



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Petrophysicist

Mud logging

Well logging• LWD

• Open hole

Petrophysicist

Mud logging

Well logging• LWD

• Open hole

Coring



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Petrophysicist

Mud logging

Well logging• LWD

• Open hole

Coring

Flow testing• DST

Reservoir description includes:

Reservoir RockThickness (h)

Net pay (h)

Average porosity (Φ)

Averagepermeability (k)



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Appraisal

Example: "Our Reservoir" ‐ Appraisal

In the exploration phase, a potential pay zone was identified at 5750 feet (1753 meters) KB. In Exploration Well #1, reservoir quality rock was found at the targeted depth, but it was a dry hole.

A second location was identified and a second exploration well spudded in. This hole encountered potentially commercial deposits of oil and gas at 5750 feet (1753 meters) KB.

In “Our Reservoir”, the presence of oil and gas was determined with a show on the mud log and confirmed by open hole well log analysis and core analysis. The drill stem test (DST) confirmed the flow of oil and gas to the surface at commercial flow rates.

During well logging and coring operations of "Our Reservoir", its age and lithology were identified as a Permian beach sandstone, providing an insight into the shape of the reservoir and its rock properties.

This provides a basic reservoir description and sufficient information to estimate stock tank oil initially in place (STOIIP) and initial production rates in order to make the commercial/non-commercial decision; taking into account oil price and other factors.

Several other properties of "Our Reservoir" are determined in the appraisal phase:

Location: Onshore

Datum Depth: 5,750 ft (1,753 m) KB

Reservoir Pressure Pr: 3,500 psia (24,132 kPa)

Formation Volume Factor Bo: 1.310 RB/STB

GORS: 567 SCF/STB

Gravity: 36º API

Porosity Ø : 22%

Initial Water Saturation Swir: 20%

Oil Permeability KO: 150 mD

Brine Permeability KW: 0 mD



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Appraisal

Asset Economic Cycle: Appraisal

In the appraisal phase, capital expenditure is invested to acquire stratigraphic, structural, formation, and fluid data. This data provides the reservoir engineering, geoscience, petrophysics, and production departments the information they need to declare commerciality. In this stage, the STOIIP and production estimates are also confirmed.

If the appraisal program has been successful, there is sufficient information to move forward, make the final investment decision (FID), initiate the field development plan (FDP), and begin facility design and commercialization to maximize economic value within regulatory and environmental constraints.



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The production segment includes first developing wells and facilities, then producing oil and gas from the asset, from first oil through its maturity, until it reaches its economic limit.



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Asset Production Forecast Models

This is an asset production forecast model. The X-axis indicates the number of years’ planned production (it could also be cumulative production), and the Y-axis indicates the number of barrels of oil per day that will be produced as wells are developed and brought into production.

While the range of production profiles differ, depending on the circumstances, the typical model has an exploration period, a buildup period, a plateau period of peak production, and a period of decline, eventually leading to abandonment.

In this example, the maximum or sustained plateau production is 15,000 barrels of oil per day (2,385 m3/d). The number of wells drilled to meet plateau production is based on data collected during exploration and appraisal. This data includes information used by the petroleum engineer to estimate the daily production per well.



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Asset Production Forecast Model Variations

Major North Sea Oil Field

In this North Sea oilfield example, there is a rapid build-up to plateau production with a recovery rate of approximately 10% of reserves per year.

Because of the hostile operating environment and high cost of putting the production facilities and associated infrastructure in place, rapid payback was required; so the fast build-up in production was sustained for a relatively short period of time, and then a rapid decline in production was both planned and seen.

Minor North Sea Oil Field As the North Sea province matured, it became economic to bring small fields into production. Usually though, for these marginal fields, an even higher annual recovery rate was required with an even steeper drop-off in production.



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Example: "Our Reservoir" ‐ Development and Production

In “Our Reservoir”, a number of producing wells were drilled into the reservoir rock in the exploration phase. It was confirmed as a commercial field in the appraisal phase. Production wells were drilled, completed and produced oil from the formation.

The “dry” appraisal well was converted into an injection well and reservoir pressure maintained by re-injecting the produced brine into the flank, or water leg – a classic example of pressure maintenance in primary recovery.

The initial exploration well was plugged and abandoned (P&A). Over time, as the water moves up-structure, the wells close due to the migrating oil/water contact. The wells begin producing too much water to be economically viable, and will be converted into injection wells for disposal or pressure maintenance. They may also become observation wells for monitoring the progression of the oil/water contact up-structure and across the field, as well as pressure variations.



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Asset Economic Cycle: Development and Production

During the development and production phase, the required facilities are designed and constructed to move the oil and gas to market. The asset is exploited and produced over its anticipated life and beyond to its economic limit. On the E&P economic cycle, commerciality is identified and declared and the asset begins to generate revenue. Over time, as wells are added to the field, the expenses go up, but so does the revenue, and there is a move away from using risk capital (CAPEX) to using operating costs and revenue (OPEX).

An offshore field may take anywhere from 3 to 7 years for first oil after the initial discovery well. Onshore, it may take as little as 2 to 3 weeks. It simply depends on the cost and time it takes to put the facilities in place to deliver the oil from the completed well to the point of transfer into midstream or other transportation. The field development or asset plan requires drilling a sufficient number of wells to optimize hydrocarbon recovery and economic return. Geological, economic, political, and market factors influence the production profile, which will ramp-up to a sustained level of maximum or plateau production; then after a period of time begin the natural decline of the reservoir to its economic limit.



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Mature Production and Enhanced Oil Recovery (EOR)

The production segment of the E&P asset life cycle includes first developing the facilities and wells, then producing oil and gas from the asset, from first oil through its maturity, until it reaches its economic limit.

Reviewing the asset production forecast model, in this example, the mature field is one that has exceeded the 50% of production anticipated in the original field development plan. In this stage of field production, an integrated asset management team reviews the history of the field and runs reservoir simulations to decide how to push out the economic limit and continue profitable production, based on a number of economic and technological decisions.



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Mature ProductionDevelopment & Production

AppraisalExplorationExploration Appraisal Mature ProductionDevelopment &

Production


Exploration AppraisalMature Production

Development & Production

Fluid flow rate

Composition data

Fluid flow rate

Composition data

Transported to market by

Pipeline

Tanker

Transported to market by

Pipeline

Tanker

Estimate numberof drilled wellsneeded for plateauproductionprofile

Estimate numberof drilled wellsneeded for plateauproductionprofile

Field DevelopmentPlan (FDP)

Transportation



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Exploration Well #1(Dry Hole) Field

Development Wells

Production wells are those wells drilled to produce oil and gas to the surface.



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Exploration Well #1(Dry Hole) Field

Development Wells

Gas wells were spaced:

Every 160 acres (65hectares)

Or 4 wells per square mile

Traditionally, onshore wells were spaced:

Every 40 acres (16 hectares)

Or 16 wells per square mile



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FieldDevelopment

BuildupInterval

Exploration

Plateau

Capacity of Facilities15,000 bopd (2385 m3/d)

Goal:

Increase revenue

Lower operatingexpenses

Buildup

(2544)

(2226)

(m3 /

d)

(1908)

(1590)

(1272)

(954)

(636)

(318)

Monitoring daily production data: Pressure

Flow rate

Types of fluid

FieldDevelopment

BuildupInterval

Exploration

Plateau


Goal:

Increase revenue


Buildup

(2544)

(2226)

(m3 /

d)

(1908)

(1590)

(1272)

(954)

(636)

(318)


Flow rate

Types of fluid

Drilling infill wells

Workovers

Re-completing old wells



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FieldDevelopment

BuildupInterval

Exploration

Plateau


Goal:

Increase revenue


Buildup

(2544)

(2226)

(m3 /

d)

(1908)

(1590)

(1272)

(954)

(636)

(318)


Flow rate

Types of fluid

Drilling infill wells

Workovers

Re-completing old wells

Pressure maintenance: Reinject gas into top

of reservoir

Inject brine into thewater leg of reservoir

OilOil

GasGas

WaterWater

Facility Design

Type of produced fluids

Reservoir Type

Planned plateauproduction

Facility Cost

Field development

Location & Infrastructure

Onshore/Offshore

Surface Facilities



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OilOil

GasGas

WaterWater

Facility Design

Type of produced fluids

Reservoir Type

Planned plateauproduction

Facility Cost

Field development

Location & Infrastructure

Onshore/Offshore

Surface Facilities



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FieldDevelopment

BuildupInterval

ExplorationExploration

PlateauPlateau



BuildupBuildup

DecliningProductionDeclineDecline

EconomicLimit

AbandonmentAbandonment

(2544)

(2226)

(m3 /

d)

(1908)

(1590)

(1272)

(954)

(636)

(318)


Mature Field

In this stage:

An integrated asset management teamreviews the history of the field

Projects reservoir simulations to push outthe economic limit and continue profitableproduction

Artificial Lift

As oil, gas, and brineare removed fromthe reservoir,reservoir pressuredeclines

Energy availablewithin producedfluids to flow to thesurface decreases



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Artificial Lift

In a well that does notflow naturally to thesurface

• Oil is able to flowinto the reservoir,but not to thesurface

• Energy artificiallylifts oil from thebottom of the well tothe surface

• This is calledArtificial Lift

Artificial Lift

As oil, gas, and brine are removed from the reservoir,reservoir pressure declines

Energy availablewithin produced fluids to flow to the surface decreases


• Oil is able to flowinto the reservoir,but not to the surface

• Energy artificiallylifts oil from the bottom of the well tothe surface

• This is calledArtificial Lift

Rod Pump

Gas Lift Assemblies

Injection Gas In

Produced Hydrocarbons Out

Side Pocket Mandrel with Gas Lift Valve



CompletionFluid

Single Production Packer

ESP

Power Cable

Switchgear

Seal

Motor

Transformer

Pump

Power Supply440v – 660v



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Exploration Appraisal Mature ProductionDevelopment &

Production


Exploration AppraisalDevelopment & Production

Mature Production

At Mature Production• As oil, gas, and

brine are removedfrom the reservoir,reservoir pressuredeclines

• Energy availablewithin producedfluids to flow to thesurface decreases

Mature Production



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Mature Production


• Oil is able to flowinto the reservoir,but not to thesurface

3D and 4D Seismic Technology



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Improved Oil Recovery





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Brine Injection Well

Secondary Oil Recovery



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Enhanced Oil Recovery (EOR) – Tertiary

Tertiary Recovery• Recovers oil not

recovered duringprimary andsecondary


Miscible/CO2 Floods• Remaining oil

mixes with drivewater so that oilmixed with brinemoves intoproducing wellbore

EOR projects requiresignificant investment



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If economic limit isreached, companycan dispose of assetby selling to acompany with loweroverhead and theability to operate thefield at or above itseconomic limit


Discovered and operatedby BP for over 40 years

Declared non-economic intheir financial model

Apache Oil purchased thefield from BP, lowered theoperating costs andapplied technology

Extended the economiclimit and returned field tohistorical production levels

Discovered and operatedby BP for over 40 years

Declared non-economic intheir financial model

Apache Oil purchased thefield from BP, lowered theoperating costs andapplied technology

Extended the economiclimit and returned field tohistorical production levels



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Well Decommissioning

If disposal of a non-profitable oilfield isnot possible, fielddecommissioningwill take place


Referred to as “fieldabandonment”

Physicalabandonment byplugging wells

Decommissioning andremoving surfaceequipment andreturning site to itsoriginal condition

Cement Plug

Steel Casing



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Offshoredecommissioningmay includeremoving thestructures orrepurposing theasset

• Laying the platformdown to create anartificial reef


Referred to as “fieldabandonment”

Physicalabandonment byplugging wells

Decommissioning andremoving surfaceequipment andreturning site to itsoriginal condition



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Mature Production and Enhanced Oil Recovery (EOR)

Asset Economic Cycle: Mature Production

Throughout the life cycle of the field, as oil and gas is produced, peak or plateau production is reached, then the natural decline of the reservoir begins – in this example, around year 10. When the field has produced 50% of its initial recoverable reserves estimate or has been in production for 25 or more years, it is referred to as a mature asset. The production department then faces a number of challenges in order to minimize this rate of decline and ensure that the field remains profitable over an extended period to the planned economic limit.



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Economic Drivers

Overview

The oil business differs significantly from all other types of commercial enterprise. The greatest factor that makes the petroleum industry unique is its degree of capital intensity, which pervades all segments of the petroleum industry from exploration through marketing. To understand the economic drivers of this important industry, you will learn about:

Production forecasts and reserves. Supply and demand. Pricing influences. Risk and uncertainty.



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Production Forecasts and Reserves

Revenues from oil and gas producing operations are derived from sales. The most critical concerns in evaluating a producing property are its present and future producing rates, income received for that production, operating costs, taxes, and its ultimate recovery.

Forecasting commercial crude oil production from individual or groups of wells depends on several factors that affect hydrocarbon production rate from wells and fields:

Geological type and characteristics of the reservoir rock, depth, thickness, area, and structure.

Reservoir natural reservoir energy and properties of the hydrocarbons, well density, wellbore size, completion techniques, and method of production.

Facilities the capacity of the facilities constructed to handle the produced fluids.

Market demand for the produced hydrocarbons (especially gas), and the point of sale price.

Policies government and reservoir energy conservation policies may determine the maximum rate at which a reservoir may be produced.

Economic limit production will be abandoned when it declines to a rate at which it costs more to produce the hydrocarbons than they are worth. This is the “economic limit.” At the economic limit, production costs are equal to the value of the produced hydrocarbons. To continue production beyond this point will cause economic loss.

Because these factors can vary widely, production rates also vary widely. Geological factors can be altered only slightly, so the major changes in production rate over the productive life of a reservoir are based on the number of producing wells. Therefore, a production forecast must take both geological factors and knowledge of the Reservoir Development Plan (RDP) into account.



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Reserves

Oil and gas reserves are the quantities of hydrocarbons which are anticipated to be commercially recovered from known reservoirs from a given date. These reserve estimates are limited to the volume of oil and gas that can be economically produced at current conditions, technology, and government regulation.

Normally, oil and gas reserves are limited to hydrocarbon products naturally produced at the wellhead, and are subdivided into:

Crude oil. Natural gas. Condensate (Lease).

Reserve volumes are calculated at standard conditions of temperature and pressure. Natural gas reserves include any liquids which may be subsequently extracted by a gas liquids extraction plant.

Reserves-to-production ratio (R/P)

A ratio indicating the remaining lifespan of oil and gas reserves in years. One application of the R/P is to estimate the field's productive life, using existing production rates and remaining reserves.



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Types of Reserves

Different types of reserves include:

Proved Reserves

The amount of resources that can be expected to be recovered from a deposit with a reasonable amount of certainty using existing equipment and technology. Proved reserves have a better than 90% chance of being produced. The chart below illustrates how the amount of proved oil reserves has increased over the past 20 years.

Probable Reserves

Unproved reserves that analysis suggests are likely to be recoverable. Probable reserves have a better than 50% chance of being technically and commercially producible.

Possible Reserves

Unproved reserves that analysis suggests are less likely to be recoverable than probable reserves. Possible reserves have a significant, but less than 50% chance of being technically and commercially producible.



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Supply and Demand

The world’s petroleum industry operates in a cyclic supply/price/demand relationship. Supply, price, and demand are tied together as a package: a change in any one of the three affects one or both of the other two. The relationship between supply and demand affects the price paid for oil and gas, and a significant change in price will affect both supply and demand.

Think of the relationship as a balance beam with supply and demand on each end and price as the balance point. If either supply or demand change without a corresponding change in the other, then the only way that it will balance is with a change in the position of the balance point - price. Changing any one of these items will change one or both of the other items. For example, a major price increase usually leads to an increase in supply as the result of additional drilling. However, the same price increase frequently reduces demand as various conservation measures are taken. The result is an imbalance of supply and demand, which may lead to a lower price.

The consequences of lower prices have a far-reaching impact. Because of the investment associated with exploration and its consequent impact on cash flow, exploration is curtailed when prices and income decline. This will impact the supply situation five to ten years out, as existing production is not replaced.



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Other Factors Affecting Supply and Demand

Besides price, other factors may affect supply and demand:

Consumption Cycles

There are marked seasonal cycles of consumption (heavy gasoline demand for summer driving and heavy home heating loads in winter), which must be anticipated in planning refinery runs months ahead of time.

The gas industry experiences a semiannual cycle with peak loads in summer and winter and low demand in spring and fall.

Transportation

Since crude oil production and local consumer demand are often far removed from one another, transportation is also a factor in setting the demand for certain crudes. Transportation costs vary with the means of transport and

volumes. Political jurisdictions and sometimes the physical characteristics of the crude oil can also have an effect on its transportation.

Government regulation and industry groups working together ensure that crude oil is transported safely and efficiently around the global.



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Global Supply and Demand

The demand for energy has been driven by the growth of the BRICS countries. The supply response has been driven by high prices and the application of technology. These technologies include shale oil and gas development, particularly in the USA; deepwater production, and oil Sands.

Crude Oil

Natural Gas



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Pricing Influences

Throughout much of the history of the oil industry, hydrocarbons were not freely traded commodities, but were considered special commodities whose prices were determined by one group or another. For more than 100 years, up to the early 1970's, the price of oil was agreed upon by the major international oil companies with the assistance of the Texas Railroad Commission (TRC).

The TRC would set the Texas allowable monthly oil production at a rate virtually equal to the demand for Texas crude oil by the major oil purchasers in the state. This eliminated any excess oil in the marketplace and effectively kept the price of oil at a constant value. The system worked as long as the oil-producing capacity in Texas and elsewhere in the U.S. exceeded demand, so if demand increased it was just a matter of producing more oil from the existing wells.

This all changed in 1972, when oil production peaked in the U.S. and the demand for oil in the U.S. began to exceed domestic production. Shortly thereafter, the Organization of the Petroleum Exporting Countries (OPEC) raised the price of crude oil as they had sufficient market power to do so. OPEC raised oil prices significantly again in 1979, but this was followed by a collapse in pricing power.



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With rising oil prices in the 1970s, demand began to shrink. These higher prices brought about new production through investment in enhanced oil recovery projects, and spurred exploration and development in resources that were not economical at lower prices.

By the mid-1980's, the price for oil was being determined by the spot market for oil and it was treated like any other commodity whose price is set in the market place; i.e., reflecting supply and demand for that product. This has introduced more volatility into the price of oil since 1980. Today, OPEC can still exercise some control over the price of oil, but only through control of the oil supply, exercised by a quota system among its members.



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Pricing Influences

OPEC Formation

The creation of the Organization of the Petroleum Exporting Countries (OPEC) occurred at the Baghdad Conference in Iraq in September of 1960, at a time when decolonization meant that new countries were emerging in the developing world. A handful of multinational companies, known as the "Seven Sisters" dominated the global petroleum industry at the time, and OPEC member countries maintained that it was the right of all countries to "exercise permanent sovereignty over their natural resources in the interest of their national development." In accordance with its statute, the mission of the Organization of Petroleum Exporting Countries (OPEC) is to:

"Coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry."

OPEC currently includes 12 member countries who have agreed to cooperate on matters related to the production and export of crude oil. Below are the countries with the year each joined OPEC:

Founding Members: Later Members:Iran (1960) Iraq (1960) Kuwait (1960) Saudi Arabia (1960) Venezuela (1960) Qatar (1961)

Libya (1962) United Arab Emirates (1967) Algeria (1969) Nigeria (1971) Angola (2007) Ecuador (rejoined 2007)

Ecuador and Gabon were members of OPEC until the early 1990s, but withdrew due to low export levels. Indonesia withdrew in 2008 after it became a net importer of oil. In 2016, both Gabon and Indonesia announced their intention to rejoin OPEC.

According to recent estimates, three-quarters of the world's proved oil reserves are located in OPEC member countries and they produce about 40% of the daily crude production.



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Pricing Influences

Pressure and FlowGas Exporting Countries Forum

OPEC is only concerned with crude oil, so in 2008 a new organization was formed comprised of natural gas exporters. When the Gas Exportering Countries Forum (GECF) was announced, it was explicitly stated that it was not their intent to be a cartel; i.e., not formed to set gas prices, but to achieve global security and energy security in the gas industry and to seek a balance between exporters, transit states and consumers involved in natural gas.

Since the distribution of natural gas worldwide is quite different than the distribution of oil reserves, the membership of this organization is quite different than OPEC. In 2014, GECF countries had 68.5% of the world’s natural gas reserves and produced 39.7% of the daily natural gas production.

Russia has the largest gas reserves in the world, comprising about 24%, followed by Iran (17%) and Qatar (13%). Because of Qatar’s importance in the gas industry, Doha, its capital, was chosen as the location for the GECF permanent secretariat. The following is the list of the 14 members of GECF in order of their gas reserves (gas production):

1. Russia (1) 2. Iran (3) 3. Qatar (2) 4. Venezuela (11) 5. Nigeria (9) 6. Algeria (4) 7. Iraq (12)

8. Indonesia (5) 9. Malaysia (6) 10. Egypt (8) 11. Libya (13) 12. Netherlands (7) 13. Bolivia (10) 14. Equatorial Guinea (14)



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Risk and Uncertainty

The petroleum exploration and production industry is characterized as a “risk business.” This includes not only the geological risk of locating a commercially viable oil and gas asset, but oil and gas pricing volatility also adds significant financial risk that must be managed. Traditionally, gas and oil companies manage their exposure to risk through diversification in geography and type of asset, as well as vertical integration of E&P activities with downstream refining and marketing.

Uncertainty means that the eventual outcome of a decision or event is not precisely known, and the degree of uncertainty is described by the probability that it will occur. This implies that a range of possible outcomes can be determined, and the probability of each can be estimated by applying mathematical probability theories to the decision-making process.

Risk, on the other hand, indicates there is a possibility of incurring economic loss or reduced value. High risk ventures are ones with a chance of a large loss, even if the probability of such an occurrence is small.

Key terms in understanding risk and uncertainty include:

Certainty Only one possible outcome.

Uncertainty Recognition that more than a single outcome is possible, with each outcome having a finite probability of occurrence.

Risk Possibility of incurring economic loss or reduced economic value.

High Risk The chance of incurring a large loss, even if the probability of doing so is very small.

Outcome One of the possible events that can take place.

Probability The chance between 0% and 100% that a particular outcome will occur. A probability of 0% means that it is certain not to occur, while a probability of 100% means that it is certain to occur. All other probabilities in this range describe uncertainty.



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The decision to undertake a project is not only affected by the anticipated gain, but also by the degree of uncertainty of both the timing of events and the ultimate outcome. When evaluating exploration and production ventures, the most significant types of uncertainty are:

Uncertainty of occurrence (exploration). Uncertainty of magnitude (appraisal). Uncertainty of production rate (development and production).



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Types of Risk

There are four fundamental approaches to coping with risk and uncertainty:

1. Diversification – vertical integration of upstream crude production with downstream refining and marketing; operating a diverse portfolio of assets.

2. Reducing exposure – taking a lesser interest in a greater number of ventures.

3. Avoidance – if risk is particularly great or the reward too low, it may be better to simply walk away.

4. Insurance – does not reduce risk, but distributes it over time and shares it with others in the same insurance pool.

Three of the most common types of risk in the E&P segment of the oil and gas industry include:

Technical

Technical risks involve the operational nature of the project. For example, are the technology and processes proven, or are they new technologies? Technical risks may include the capability and experience of the engineering and technical talent assigned to a project.

In the case of reserve estimation, the degree of technical risk also applies to the certainty of the hydrocarbon volumes that exist underground and whether the producing rates and ultimate recoveries projected by the engineers will actually be realized.

Some technical risks include:

Geological Engineering Dry holes Project execution Timing



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Economic

Risk also affects oil company financing. An oil company does not take on long term debt to drill exploratory wells; it is usually funded with internal company resources. An oil company is more likely to seek external financing during project development, because the likelihood of making a profit is high.

Economic risk also covers a very broad range of potential situations, such as the present and future levels of oil and gas prices. The physical nature of the project is also highly important. For instance, the principal economic risk associated with an infrastructure project may be confined to the possibility of capital cost overrun and timing of completion; whereas, in the case of a depleting asset, such as mining or petroleum production, the prime economic concerns probably involve drilling and operating costs, inflationary effects, and interest rates. And as always, product prices and demand over the life of the project add additional risk.

Some economic risks include:

Inflation and interest rates Oil and gas prices Environmental Exchange rate

Financing/capital Supply/demand Operating costs Timing



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Political

Political risks involve the uncertainty of possible changes in regulatory policies and the degree to which such changes may affect project revenues. Regulatory policies can be subdivided into fiscal and non-fiscal considerations.

Fiscal aspects primarily include continuity in the levels of local and national taxation, exchange controls, and limitations on import and export of foreign and local currencies; changes in levels of customs duties on imported equipment and supplies, and possible imposition of locally denominated prices for the production.

Non-fiscal political risks include possible interruptions by regulatory authorities over environmental matters, disagreements over hiring or firing of local personnel, determinations of commerciality, or outright nationalization. Matters such as the provisions for transfer of operatorship to the NOC and the potential for political unrest in the host country also fall under this category.

Some political risks include:

Governmental policies Laws and regulations Nationalization Environmental

Financial/Capital Exchange rate Taxation Timing



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Example: Geological Risk Analysis

One of the technical risks is geological risk. The exploration geology team is responsible for performing a geological risk analysis of the project to understand the probability of a successful petroleum accumulation. This is also called risking, and each essential element is risked separately. For their analysis, the team uses data provided by host governments, commercially available seismic and geochemical studies, and other data that is available from partners or analogues.

Each element is listed and risked independently and then multiplied together:

Petroleum System Element ProbabilitySource rock present 0.95 Matured in oil or gas window 0.75 Source and reservoir rock migration path 0.50 Reservoir quality rock (permeability and porosity) 0.50 Seal exists and actually seals 0.75 Total (0.95 x 0.75 x 0.50 x 0.50 x 0.75) 0.13 Probability of Reservoir 13 in 100

In this case, there is a 13% chance that there is a successful petroleum accumulation.

In actual practice, Monte Carlo simulation is used to generate various outcomes based on the probability distribution.



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Review

In this section, you learned about:

Production forecasts and reserves. Supply and demand. Pricing influences. Risk and uncertainty.



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Documents

COPYRIGHTcloud1.activelearner.com/contentcloud/portals/hosted3/... · 2019. 12. 9. · Petroleum Applications in History According to recorded history, the oil industry began at least