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What is a marginal field?
Some statistics– 1 to 1000 mmbbls can all be marginal– Discoveries in UK 1996-1999 averaged 29 mmbbls– 315 Undeveloped Discoveries in UK as at beginning
2000
Economically – There are good fields
– no serious questions about development decision– There are bad fields
– forget it for a few years
– And there are marginal fieldsSources, UKOOA, PILOT and Wood Mackenzie
What drives the economics of a project?
Technology– Can give productivity– Can provide new and low cost engineering solutions
– Covered elsewhere today– and tomorrow!
Oil Price
Reservoir
Oil Prices and Marginal Fields
Rule 1– Do not believe today’s oil price
Rule 2– Do not believe your company’s economic assumptions
Rule 3– Believe the market
Rule 4– Be patient
Rule 1 - Do not believe today’s oil prices
Sources Platts, UKOOA and the BBC
2001 Brent Oil Prices $/bbl
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01-Jan-01 02-Mar-01 01-May-01 30-Jun-01 29-Aug-01 28-Oct-01 27-Dec-01
Oil
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/bb
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Worries over economic slowdown and oversupply
Opec cuts production coupled with cold snap in US Iraq stops exports raising
under supply worries
Fear of oversupply coupled with economic slowdown
Supply fears following the events of September 11
Fears of the demand impact of recession coupled with oversupply
Rule 2 - Do not believe your assumptions
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Source Wood Mackenzie
Rule 2 - Do not believe your assumptions
Remember what they are for– Budgets– Medium to Long Term Planning– Ensuring comparability for decisions– For projects that have an economic life “through the
cycle”– e.g. exploration, larger fields
– typical “economic” lives of 5-15 years
Not appropriate for the small “marginal” field– oil price cycle is not relevant to most Marginal Projects
– economic life is too short
Rule 3 - Believe the market
Offer management the ability to lock in the oil price– you can “guarantee” them a return if they are willing to
lock in– (if they do not wish to lock in
– implies they believe the market will go higher!)
So they should still be willing to sanction
Rule 4 - Be Patient
If the available price is not good enough– be patient
– put the project on the shelf and wait….
A Small but Marginal 10 mmbbl Field
Project is ready to go – “happy” with technology and reserves– development plan written– first oil 18 months from sanction
Project Manager– Wants his project sanctioned!
Project needs $18+ to deliver required return – Economic Life only 2 years from first oil
Timing is everything
Early 1999
Our project is not economic
We can only lock in ca $15/bbl
Spot Prices
2004 prices
Timing is everything
2005 prices
$20
$30
Spot Prices
Late 2000
Our project generates a high return
We can lock in $20 to $25/bbl
Timing is everything
2005 prices
$20
$30 Spot Prices
Late 2001
Delay has lost us the super returns but..
Our project can still give a good return
We can still lock-in ca $20bbl
Reservoir
Economists worry about Reservoir Engineers– especially what they tell us about the reservoir!
Reality is – like price, reserves are not guaranteed
– we can lock in the price– but we cannot lock in the reserves
Our Marginal 10 mmbbl Field
Not actually a 10 mmbbl field
It has a range of Reserves– Say 3 to 15 mmbbls– Risk of losing money significant if we end up at lower end
of reserve range – even after locking in high prices!
Coping with Reserves Uncertainty
Some thoughts– Each project has a project manager– His/Her objective for field development decisions
– give management a return– reduce risk
– studies, reprocessing seismic, more studies– costs time, effort and money– all value destructive
– but point forward economics still look good!!!
For developments we tend to become risk averse
Not appropriate for small discoveries
Exploration Mindset
Drill a portfolio of opportunities– Some work– Most don’t!
Accept the possibility of loss – because it is balanced by value derived from successes
Development Mindset
Develop a portfolio of opportunities– Most work– Some don’t
Accept the possibility of loss – because it is balanced by value derived from successes
Think Portfolio
Most companies have several marginal discoveries
Should consider small discoveries more like exploration– Treat them like an exploration portfolio– Accept uncertainty
– Don’t work them to death and destroy value – Each project sanctioned is just part of your portfolio
– If it fails it is NOT a disaster– Some will work better then expected
Spreading Risk – improves chance of obtaining required return overall
In Summary
Do not be ruled by oil price uncertainty– Be patient
– and overrule it by locking in when advantageous
Think Portfolio– Do not overwork the problem– Spread the risk and improve the certainty of return