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    PTEG 201

    Lecture 1

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    University of Petroleum & Energy Studies

    Introduction to Petroleum Operations

    Instructor:Dr. Sokari Braide

    Professor of Petroleum Geoscience

    PTEG 201

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    Teaching PlanPRE-UPSTREAM Operating Agreements

    UPSTREAMExploration and Production

    DOWNSTREAM Refinery Operations and Marketing

    Exploration Operations Drilling Operations Completion Operations Production Operations Introductory Well Control Gas Management

    MID-STREAM Transportation from producing field to refinery

    Search and Prospecting Pool: Geological andGeophysical Methods

    Drilling and Petroleum: Drilling Rig, PowerSystem, Drilling Fluid and Circulation System, Bits, Drill Pipe, Directional Drilling Well Logging, DST Casing and Cementation Perforation and Well Activation Production Tubing and Well Head Assembly Self Flow and Artificial Methods of Production ofOil/Gas

    Separation and Storage Transportation, Field Processing and Refining Marketing and Distribution

    Course Outline

    3 Lectures per week

    Prof. Sokari Braide College of Engineering Studies

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    PETROLEUM OPERATIONS

    This is a vast topic that that covers activities in the entire OilIndustry from what we can term as UPSTREAM toDOWNSTREAM.

    Since this course is introductory, we will keep it simple, but giveyou a thorough understanding of the operations in the entire OilIndustry.

    Later in your course of study at UPES, you will have anopportunity to study in more details aspects of the industry youwish to pursue a career in.

    Prof. Sokari Braide College of Engineering Studies

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    COURSE ASSESSMENT

    Mid-Term Examination between 5 10 October 2009 20%

    End-Term Examination between 21 30 December 2009.50%

    Class assignments will also be given as continuous assessments30%

    * Sample questions on topics will be given as revision aid s. Some of thesequestions may be repeated in the mid-term / end-term examinations. It wouldbe therefore advantageous to practice answering these sample question foran in-depth understanding of the course.

    Prof. Sokari Braide College of Engineering Studies

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    Nontechnical Guide to Petroleum Geology,Exploration, Drilling and Production (2nd Edition)

    575 pages, Pennwell Books (2001)by Norman J. Hyne

    Recommended Textbook

    Plus references to the internet

    Prof. Sokari Braide College of Engineering Studies

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    I received my formal geoscience training on three continentsAfrica, Europe and North America

    So who am I and why should you be listening to me?

    1998 CPG # 5499Division of Professional Affairs,American Association of Petroleum Geologists

    1982 Ph.D. in Geology

    University of Cincinnati, Cincinnati, Ohio, USA1977 M.Sc. in SedimentologyUniversity of Oxford, Oxford, England

    1972 B.Sc. in GeologyUniversity of Ibadan, Ibadan, Nigeria

    2005 fnapeConferred a Fellow,

    Nigerian Association of Pet roleum Explorationists

    NAPE / CGG VERITAS DISTINGUISHED2007 Education and Mento rship AwardIn recognition of immense support and contributionsto the study of Geoscience s and the Nigerian Oil Industry

    Prof. Sokari Braide College of Engineering Studies

    http://upload.wikimedia.org/wikipedia/commons/c/c3/BlankMap-World.pnghttp://upload.wikimedia.org/wikipedia/commons/c/c3/BlankMap-World.pnghttp://upload.wikimedia.org/wikipedia/commons/c/c3/BlankMap-World.pnghttp://upload.wikimedia.org/wikipedia/commons/c/c3/BlankMap-World.pnghttp://upload.wikimedia.org/wikipedia/commons/c/c3/BlankMap-World.pnghttp://upload.wikimedia.org/wikipedia/commons/c/c3/BlankMap-World.pnghttp://upload.wikimedia.org/wikipedia/commons/c/c3/BlankMap-World.png
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    2009 Professor of Petroleum Geoscience, UPES2008 Consultant, GaryPercival Limited2007 Shell Professor of Geology, University of Port Harcourt2006 Visiting Professor of Geology, NSU, Keffi2002 Senior Regional Geologist, SNEPCO, Lagos2000 Head of Scouting, SPDC, Lagos1998 Technical Auditor, SPDC, Port Harcourt1996 Seismic Interpreter, SPDC, Port Harcourt1991 Regional Geologist, SPDC, Warri1990 Associate Professor, Federal Univ. of Technology, Minna1987 Senior Lecturer, Federal Univ. of Technology, Minna1983 Lecturer, Federal Univ. of Technology, Minna1980 Research Assistant, University of Cincinnati1978 Lecturer, University of Calabar1977 Junior Field Engineer, Schlumberger, Paris1972 Rhodes Scholar, University of Oxford

    And my career spans the last 37 years

    Prof. Sokari Braide College of Engineering Studies

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    PreambleThe OIL INDUSTRY is BIG BUSINESS. Very big business that is capital intensive.

    Therefore, all operators in this industry have a common goal which is togenerate cash for their investors.

    Thus the petroleum operator must at all times be aware of current trends inoil prices, targets, financial returns, budgets for wells and fields

    Nothing is done in the industry for academic reasons.

    We will therefore demonstrate industry relevance throughout this course.

    Prof. Sokari Braide College of Engineering Studies

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    UPSTREAM

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    EP Lifecycle, from exploration to abandonment

    MAXIMISE

    NPV

    Exploration

    Appraisal

    Primary Devt

    Abandonment

    Time

    Further Devt

    Production

    +

    0

    -

    On average these operations span 20 years for a field

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    Project phases and cash flow

    The su m m arized cash resul t o f a pro ject agains t t im e.

    Typically, E & P projects last for over 20 years,which is much different from other industryprojects.

    Key business / investment decisions are made atthe start of most phases.

    Cash-flows are used for decision making andproject ranking.

    Prof. Sokari Braide College of Engineering Studies

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    If we have lots of oil and gas are we OK ?

    Unfortunately not Must be able to

    Develop the resources Bring the oil to market: convert barrels to $ Generate income

    Net income = Revenue (CAPEX + OPEX + royalty + tax + depreciation +abandonment/ remedial cost)

    And revenue must deliver required rate of return on investment i.e. Revenue/ Time >> Return available from alternative use of capital

    To ensure common datum, all cashflows are expressed as NetPresent Value (NPV) with future expenditures/ revenue discountedby a calculated factor (Discount Rate) to model future inflation.

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    Current state of play

    Current reserves = c. 1000 billion bbl About 40 years worth at current consumption Current production = about 77 million bbl/day OPEC = about 60% production total USA = primary consumer (22 million bbl/day) Demand increasing / supply diminishing New developments needed No likely new large fields = stagnation 2010

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    Effective field management

    Clearly therefore it is essential that we make the best use ofthe resources we have, and dont waste time and money onresources that will not help either our company, itsinvestors, or the world oil situation.

    Field location and development must be a slick,economically viable process.

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    Companies in the oil and gas industry may be involved in onlyupstream activities:Exploration and Production activities

    Or they may also be involved in downstream activities:Transportation, Refining, and Marketing activities.

    Overview of Upstream Operations

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    Phases Encountered in Upstream Operations

    The phases of operations historically have been of great importance in

    accounting for upstream activities. For example, different types of oil andgas contracts encountered in international operations may require sortingupstream oil and gas activities into various phases.

    Upstream oil and gas operations are typicallydivided into the following phases:

    1. pre-license prospecting2. mineral right acquisition/contracting

    3. exploration4. evaluation and appraisal5. development6. production7. closure

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    The first five phases may be referred to collectively as PREPRODUCTIONPHASESand the last two phases may be referred to as PRODUCTION PHASES;although, substantial levels of production may occur during the developmentphase.

    The sequencing of the phases is not identical for all companies or for allprojects. Moreover, in any particular operation and/or company, two or moreof these phases may well be combined into a single phase; for example, pre-license prospecting and exploration or production and closure.

    In addition, the phases will almost certainly overlap, for example explorationduring the development phase or production during the development phase.

    Nevertheless, in order to understand how costs are shared in variouscontracts and the rationale behind certain issues regarding capitalizationversus expense decisions, it is helpful to understand these phases.

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    Phase 1 pre-license prospecting

    Pre-license prospecting (sometimes referred to as pre-license exploration)

    typically involves the geological evaluation of relatively large areas beforeacquisition of any petroleum rights.

    The activities involved in pre-license prospecting vary widely but are usuallygeneral in scope and are not necessarily part of an integrated project. For

    example, sometimes companies purchase geological and geophysical data(G&G) covering fairly large areas of a country (frequently referred to as alibrary).

    Other activities include researching and analyzing an areas historic geologicdata, carrying out G&G studies, or assessing topographical information.

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    Some pre-license prospecting activities may be undertaken without havingphysical access to the area; however, usually pre-license prospecting cannottake place without first obtaining permission from the owner of the landand/or the mineral rights. (In most countries other than the United States, the

    government typically owns the mineral rights and hence permission must beobtained from the government.)

    Satellite imagery, aerial photographs, gravity-meter tests, magneticmeasurements, and various similar observations or measurements are oftenused to target specific areas without having to physically enter onto theproperty.

    Geologists may also study areas where the rock formations are readilyobservable, in mountainous areas or where roads or railways have beenconstructed.

    More detailed evaluation of an area of interest, such as conducting seismictesting, requires specific permission of the owner of the land and/or themineral rights owner since such activities involve physical testing on the site.

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    In countries where the government owns the mineral rights, the programthe government has in place largely determines the extent and nature ofthe pre-license prospecting that occurs.

    If the government is actively seeking to contract with companies forpetroleum exploration and production, it may be quite eager toaccommodate companies by allowing them access to the area of potentialinterest.

    In some cases companies may be required to purchase or otherwiseacquire G&G information directly from the local government.

    Often companies are required to purchase such data whether or not thecompany regards the data as being especially beneficial.

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    Phase 2 mineral interest acquisition/contracting

    Mineral interest acquisition involves the activities related to obtaining from themineralrights owner the legal rights to explore for, develop, and produce oil or gas in aparticular area.

    Typically the oil and gas company receives a mineral interest if the negotiationsare successful. A mineral interest is an interest in a property that gives the ownerthe right to share in the proceeds from oil or gas produced. In U.S. domesticoperations, these legal rights are acquired by entering into a lease agreement withthe mineral rights owner(s). In operations outside the United States these legalrights are acquired by entering into any one of a number of different types of

    contracts.

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    In the United States, mineral rights are frequently owned by individuals.The type of contract executed in the United States between the individualmineral rights owner(s) and the company seeking to explore, develop, and

    produce oil and gas from the property is an oil and gas lease.

    In the United States mineral rights may also be owned by the governmentand other entities. For example, in the United States, federal or stategovernments own the mineral rights in offshore locations and in federal orstate-owned lands. Lease agreements are also used when contracting withthe government for mineral rights in the United Sates.

    These contracts include:a. concessionsb. production-sharing contracts

    c. risk service agreements

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    Outside the United States mineral rights are typically owned by thegovernment and the contracts executed between the government and the oiland gas producer are quite varied.

    Concession agreements are quite popular and are used by many governments,including the UK, Canada, and Australia.

    Perhaps the most commonly used contract is the production-sharingcontract (PSC) or production-sharing agreement (PSA).

    This contract is used to acquire petroleum rights in many countries, includingIndonesia, Malaysia, China, Thailand, Angola, and Nigeria, to name a few.

    Risk service agreements are less popular but nevertheless are also used incontracting for the right to explore and produce oil and gas. Risk serviceagreements have been used in such countries as Venezuela, Bolivia, andKuwait.

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    Leases

    An oil and gas lease grants to the oil and gas company the right (andobligation) to operate a property.

    This includes the right to explore for, develop, and produce oil and gas fromthe property and also obligates the company to pay all costs. (The type ofinterest owned by the oil and gas company that obligates it to pay all of the

    costs is a working interest and the oil and gas company is a working interestowner. If there are multiple working interest owners in the same property,the property is a joint working interest and the parties are joint workinginterest owners.)

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    a. Payment of a bonus (called a signature bonus) by the lessee (the oil and gascompany) to the lessor (the mineral rights owner) at the time the contract is signed

    b. Payment of a royalty equal to a specified percentage of the value of the oil and

    gas produced each period

    c. The lessee being responsible for payment of essentially all of the costs andincurrence of all of the risks associated with exploration, development, andproduction without reimbursement from the lessor

    d. The lease remaining in effect indefinitely, so long as minerals continue to beproduced from the property

    The typical mineral lease calls for:

    In addition to paying a royalty to the lessee and paying the costs incurred in developingand operating the property, the oil and gas company must pay certain taxes.

    For example, income taxes to the federal and/or state governments and taxes to the stategovernments are assessed at the point of production based on the volume or value ofthe oil and gas produced. These latter taxes are typically referred to as severance orproduction taxes.

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    Concession agreements.

    Concession agreements are similar to lease agreements.

    The primary difference is that concession agreements are encountered in operationsoutside the United States where the mineral rights owner is the local government. Inaddition, some concession agreements provide for government participation in the formof a joint working interest.

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    Typical provisions found in a concession agreement are:

    a. Payment of a bonus by the exploration and production company to the government atthe time the contract is signed or at specified points during development and/orproduction.

    b. Payment of a royalty equal to a specified percentage of the value of the oil andgas produced or an in-kind payment of a specified portion of oil and gas production.In-kind payments involve payment in physical quantities of oil and gas as opposed topayment in money.

    c. The contractor ( i.e., the non-government oil and gas company(ies) involvedin the contract) being responsible for payment of all of the costs and incurrence of allof the risks associated with exploration, development, and production withoutreimbursement.

    d. The agreement remaining in effect indefinitely, so long as minerals

    continue to be produced from the contract area.

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    As with a lease agreement, the oil and gas company is responsible for paying all of thecosts incurred in developing and operating the property.

    The oil and gas company also must pay a variety of taxes, including income taxes andseverance type-taxes often referred to as value added taxes.

    In addition in some countries, such as the UK, Australia, and Trinidad, specialtaxes on petroleum profits are also paid.

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    Production sharing contracts (PSC).

    As mentioned earlier, in the international petroleum industry today, the mostcommonly used arrangement by which companies obtain the rights from thegovernment to explore for, develop, and produce oil and gas is the PSC or PSA.

    Although the precise form and content of PSCs vary from country to country, and evenwithin a single country, the following features are likely to be encountered:

    a. The contractor pays a bonus to the national government at the time the contract issigned. Additionally, development bonuses may be paid if the operation goes intodevelopment and/or production bonuses when predefined production levels areachieved.

    b. The contractor pays royalties to the national government as productionoccurs.

    c. The national government retains ownership of the reserves. It simplygrants the contractor the right to explore for, develop, and produce the reserves.

    Prof. Sokari Braide College of Engineering Studies

    d The contractor is required to bear all of the costs and risks related to exploration

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    d. The contractor is required to bear all of the costs and risks related to explorationwith the government (through a state oil company) having the option toparticipate in development and production as a working interest owner.

    e. The contractor is required to provide infrastructure development for the hostcountry. For example, the contractor may be required to build roads, water systems,hospitals, schools, and other facilities before or during the course of operations.Additionally, the contactor is typically required to provide training of local personnelrelated to the project. The costs associated with infrastructure development andpersonnel training may or may not be recoverable from future production.

    f. Operating costs and, perhaps, exploration and development costs arerecoverable out of a specified percentage of production. The estimated volumeof oil or gas production necessary to recover the agreed upon costs is referredto as cost oil.

    g. An amount of production (typically corresponding to the production remainingafter royalty and cost recovery), referred to as profit oil is typically splitbetween the government and the contractor on a predetermined basis.

    h. Since the contractor is prohibited from owning an interest in reserves, thecontractor has an interest often referred to as an entitlement interest, that is,an interest in the reserves that corresponds to its share of cost oil and profit oil.

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    Risk service contracts.

    Another type of contract encountered in international operations is a risk servicecontract.

    Risk service contracts were initially used in areas where oil and gasproduction had been achieved but the need existed to rejuvenate the field or productionarea.

    The service provided by the oil and gas producing company was typically in the form ofperforming workovers and other operations aimed at restoring or stimulating productionincluding application of current technology to currently producing fields.

    More recently, risk service contracts have also been executed in unproved areas with theservice being defined to include exploration, development, and production of anyreserves that might be discovered.

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    There is no standard risk service contract; however, features that may beencountered include:

    a. Payment of a bonus to the national government at the time the contractis signed

    b. Payment of royalties to the national government as production occurs

    c. Retention of ownership of the reserves by the national government

    (since the contractor is deemed to be providing a service)

    d. All of the costs and risks related to exploration, development, andproduction being borne by the contractor

    e. Operating costs and capital costs incurred by the contractor beingrecovered through payment of operating fees and capital fees

    f. The government (through a state-owned oil company) having the rightto participate in operations as a working interest owner

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    Regardless of the type of contract, signature bonuses are the most common paymentmade to acquire a mineral interest in a property and can range from fairly nominal

    amounts to tens of millions of dollars.

    Since a bonus can be very significant, the question of whether to capitalize or expensemineral interest acquisition costs is no small matter.

    Additionally, legal fees and negotiating costs associated with negotiating PSCs and riskservice agreements can also run into the millions of dollars.

    During the pre-license prospecting phase, costs are incurred in a highly uncertainperiod prior to a mineral interest having been secured.

    During the mineral acquisition phase, the level of uncertainty regarding the presenceof commercial oil and gas reserves continues to be very high.

    NOTE

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    Phase 3 exploration

    Exploration is the detailed examination of an area for which a mineral interest has beenacquired.

    Generally, the geographical area has demonstrated sufficient potential to justify furtherexploration to determine whether oil and gas are present in commercial quantities.

    The activities involved in exploration are similar to those in the pre-license prospecting

    phase, however they are usually concentrated on a smaller geographical area andinclude the drilling of wells.

    Exploration activities are varied but are likely to include conducting topographical,geological, geochemical, and geophysical studies and exploratory drilling.

    Specifically, exploration of potential petroleum-bearing structures involves techniquessuch as conducting seismographic studies, core drilling, and ultimately, if other types ofexploration have indicated a sufficient likelihood that petroleum exists in commercialquantities, the drilling of exploratory wells in order to determine whether commercialreserves do in fact exist.

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    Phase 4 evaluation and appraisal

    The evaluation and appraisal phase involves confirming and evaluating the presence andextent of reserves that have been indicated by previous G&G testing and exploratorydrilling.

    Exploratory wells may have found reserves; however, evaluation and appraisal are oftennecessary in order to justify the capital expenditures related to the development andproduction of the reserves in other words confirming that the reserves arecommercial.

    Specifically, after an exploratory well or multiple exploratory wells have been drilled intoa reservoir and have resulted in the discovery of oil and/or gas reserves, additional wells,known as appraisal wells, may be drilled to gain information about the size andcharacteristics of the reservoir, to help in assessing its commercial potential, and tobetter estimate the recoverablereserves.

    In addition to drilling appraisal wells and possibly further geological and geophysicaltesting, the appraisal and evaluation phase typically includes conducting detailedengineering studies to determine the nature and extent of the reserves and theformulation of a plan for developing and producing the reserves in order to obtainmaximum recovery.

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    Marketing studies may also be necessary, especially in the case of gas discoveries,in order to evaluate transportation costs and market price potential.

    In areas with a history of production, when an exploratory well finds reserves, theoil and gas company may briefly evaluate the results of drilling and then movedirectly into development.

    This is particularly likely in onshore operations in locations where an existingtransportation and marketing infrastructure exists.

    However, drilling of additional wells may be necessary in order to determinewhether the reserves are sufficient to warrant construction of a productionplatform, additional pipelines, and/or onshore facilities to handle the production.

    If additional wells are drilled in order to determine whether reserves are

    sufficient to justify installing the necessary infrastructure, they are often treatedas a part of the exploration phase.

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    In most operations, the appraisal and evaluation phase is more likely to be necessaryand is likely to much better define the reserves.

    PSC and risk service agreements often specify certain appraisal activities that must becarried out by the contractor in the event that an exploratory well indicates thepresence of reserves.

    In these types of agreements, instead of appraisal activities being defined as aseparate phase, they are often defined as a distinctive set of activities occurring

    during the exploration phase.

    In any case, even when not contractually defined, appraisal may be critical in certainlocations where there is no preexisting infrastructure for the production andmarketing of the oil and gas or in frontier areas with no history of oil andgas production, where there may be little existing knowledge of the geological

    conditions prevailing in the area and of the potential for commercial oil and gasproduction.

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    By the time a project enters the appraisal and evaluation phase, the level ofcertainty that investments will ultimately be recovered has increased significantly.

    There is little controversy that the expenditures necessary to assess and determinethe commercial viability of a field and to prepare for the development of the fieldshould be capitalized at least temporarily.

    If, however, the decision is made that the field is not commercial, manyaccountants contend that all costs incurred up to that point should be written off.

    Others argue that unless the entire area is abandoned, the costs that have beenincurred represent the total cost to achieve commercial production in the area.

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    Phase 5 development

    After the formulation of a development plan, companies typically move into thedevelopment phase.

    This phase involves undertaking the steps necessary to actually achievecommercial production. Typically this phase involves:

    a. Drilling additional wells necessary to produce the commercial reserves

    b. Constructing platforms and gas treatment plantsc. Constructing equipment and facilities necessary for getting the oil and gas

    to the surface and for handling, storing, and processing or treating the oil andgas

    d. Constructing pipelines, storage facilities, and waste disposal systems

    Development activities often continue into the production phase.

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    The development phase may be significant since the companies participating in the workinginterest may change.

    Typically in PSCs and sometimes in concession contracts and risk service agreements, the

    government (through the state oil company) has the option to participate in developmentand production.

    If this is the case, the contractor has incurred all of the costs and risks associatedwith exploration and appraisal.

    Once the information obtained during exploration and appraisal has been analyzed, thegovernment may exercise its option to participate.

    After the governments level of participation has been determined (often up to a maximumof a 51% working interest), the development phase moves forward with each companypaying theirproportionate share of future costs.

    There is little controversy regarding the financial accounting treatment of developmentcosts. Since the companies are in the process of developing an oil and gas asset and thelevel of uncertainty is relatively small, the costs are capitalized.

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    Phase 6 production

    The production phase involves the extraction of oil and gas from the earth and includes allof the related processes necessary to make the produced oil and gas marketable and

    transportable.

    Production activities include lifting the oil or gas to the surface, gatheringproduction from individual wells and transporting it to a common point in or near the field.

    Field treating and processing (for example, removal of basic sediment and water [ BS&W]and separation of the oil and gas), and storage of production conclude the productionactivities.

    The production phase is normally regarded as terminating at the outlet valve on the fieldproduction storage facility. However, based on operating circumstances, the productionfunction may be deemed to be complete at the first point of saleability of the oil and gas,which may be when the minerals are delivered to a main pipeline or to other means oftransportation, such as to a marine terminal from an offshore platform or to a refinery.

    This point is also the end of upstream activities other than closure.

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    Phase 7 closure

    At the end of the productive life of an oil or gas field, the site typically must be restoredto its pre-existing condition.

    Accordingly, the closure phase includes plugging and abandoning wells, removingequipment and facilities, rehabilitating and restoring the operational site, andabandoning the site.

    In offshore operations, equipment must be removed from platforms, platforms must be

    dismantled and removed, and any pipelines extending to or from the platforms must beremoved.

    The degree of dismantlement, restoration, and removal depends upon thelocal laws and statutes, provisions contained in the lease, concession, PSC, serviceagreement, or other contract, and on the policies of the companies involved.

    Traditionally, these activities have been referred to by a variety of names such asdecommissioning and abandonment, dismantlement, removal, and remediation, siteclosure, or asset retirement.

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    Overlap of Operations in Various Phases

    Although it is a simple matter to envision the different phases of upstream operations as

    self-contained and sequential, in reality it is often difficult to determine with precision thephase during which an event occurs or a cost is incurred.

    The phases of operations frequently overlap and in some cases they may occursimultaneously.

    Furthermore, the same assets may be used in more than one phase of upstream activitiesand sometimes, the same asset may also be used in downstream activities.

    For instance, an office may be used to manage equipment and personnelemployed in exploration, development, and production activities and also to manage thesale of products.

    To the extent that the phase of operations or the nature of specific activities influencesaccounting policies, careful consideration must be given to the overlap of the variousphases and how costs should be allocated.

    Prof. Sokari Braide College of Engineering Studies

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    Pre-license versus post-license exploration

    Pre-license prospecting has been described as occurring before a mineralinterest is acquired and exploration as occurring after a mineral interest is acquired.

    In fact, other than drilling, the exploration activities that occur before versus after theacquisition of a mineral interest may be identical.

    Exploration and appraisal during the development andproduction phases

    After the development phase has begun, additional evaluation, including exploratorydrilling may be necessary.

    Even after production has begun, activities that are exploratory in nature may occur. It isoften difficult to distinguish between costs incurred to develop anexisting field and costs incurred to explore for additional, new reserves (perhaps a newreservoir) in the same geographical area as the existing field.

    Prof. Sokari Braide College of Engineering Studies

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