MAKING DECISION IN OIL FIELD REPORT

The research presented in this project is about how to make a decision in phases of the field life cycle. Making a good decision is extremly important, because it will make profit, reduce the risk and uncertainty, it is safe for people and enviromenet. There are many factors that impact to the decison such as the data of discovery, exploration, appraisal, the reserves can recover from the reservoir, the economic of exploration, appraisal, and development; and the affect to enviroment. Decison maker need to analysis each factors and their risks an uncertainties to choose the best choice for the project. In this project, we present four problems. Firstly, the study indentifies what is decision analysis, the tools are used to make decision, and sensitive analysis. Secondly, we present the technique fators that influence making decision – reserves. Thirdly, we analyze economic factors impact to the decision in oil filed, especially the exploration and appraisal phase. And the last, we introduce the EIA report.

MAKI NG DECI SI ON

VI ETNAM NATI ONAL UNI VERSI TY, HO CHI

MI NH CI TY

HO CHI MI NH CI TY UNI VI ERSI TY OF

TECHNOLOGY

Assoc Prof Dr Tran Van Xuan

Nguye n The Vinh- Bui Nhat

EIA2

• The historical origins of decision analysis can be partially traced to

mathematical studies of probabilities in the 17th and 18th centuries by Pascal, Laplace, and Bernoulli.

• However, the applications of these concepts in business and general managementn appeared only after the Second World War

• Decision analysis is a scientific and practical method for making important decisions

• Decision analysis involves identification, clear representation, and formal assessment of important aspects of a decision and then determination of the best decision by applying the maximum expected value criterion

What is Decision Analysis (DA)

DECISION ANALYSIS

3

Why use DA?

DECISION ANALYSIS

4

• Determine the goal or objective

• Identify possible future conditions or states of nature for each random variable

Advantages of DA?

DECISION ANALYSIS

6

Apppplied mostly in industry and manufature

Application of DA in life

DECISION ANALYSIS

8

• A decision tree is a graphical representation of the decision

variables, random variables and their probabilities, and the payoffs

• Decision trees are particularly useful for analyzing situations that

involve sequential or multistage decisions

Decision tree

DECISION ANALYSIS

9

Analyze the decisions from right to left 1.Determine which alternative would be selected for each possible

2 Determine the product of the chance probabilities and their respective payoffs for the remaining branches

3 Determine the expected value of each initial alternative

Decision tree for a facility building

10

The expected value for an uncertain alternative is calculated by multiplying each possible outcome of the uncertain alternative by its probability, and summing the results

Expected value decision

in developing temperature sensor

Expected value

DECISION ANALYSIS

11

0,8 x $390.000 + 0,2 x ( - $10.000) = $310.000 3) for doing neither of these $0

The temperature sensor should be developed.

12

Determining the range of probability for which an alternative has the best expected payoff.

• The graph shows the range of values of P2 over which each alternative

is optimal.

Sensitivity analysis of 3 alternatives

14

• To find exact values of the ranges, determine where the upper parts of

the lines intersect.

• Because these are straight lines, they have the form :

y = a + bx

Where:

a is the y-intercept value at the left axis

b is the slope of the line

x is P2 15

The slopes and equations are:

+ Alternative B is best from the point P2 = 0 to the point where the alternative B line intersects the alternative C line:

16 − 14 P2 = 12 − 4 P2 → P2 = 0.4

+Alternative C is best from that point until its line intersects alternative A’s line :

4 + 8 P2 = 12 − 4 P2 → P2 = 0.67 + For values of P2 greater than 0.67 up to P2 = 1.0, alternative A is best.

Drive mechanism has the greatest geological impact on recovery factor

Decide which drive mechanism is most likely from the geology of the prospective reservoir system

Narrow the recovery factor range by predicting the thickness of the reservoir by port type

RECOVERY FACTOR AND RESERVES

Field analogue Analytical models Reservoir simulation

RF = RFP + RFS

Drive mechanism Primary recovery factor

drive mechanism (%) Depletion

The secondary recovery factor

where

Efficiency

: Microscopic sweep Efficency

Estimating recovery factor by analogue

S

− ×

Schematic graph illustrating petroleum volumes and probabilities

Proven Reserves

Unproven Reserves

1P

3P 2P

P90

P50 P10

RECOVERY FACTOR AND RESERVES

Reserves

20

Ultimate recovery (STB) = HCIIP x RF

Resever Estimation

Paremeter of HCIIP

Change in pore volume = Change in oil volume + change in free gas volume + change in water volume

The material balance technique mathematically models the reservoir

as a tank This method uses limiting assumptions and attempts to equilibrate changes in reservoir volume as a result of production

21

Production History

Solving for Exponential Hyperbolic Rate of production

Cumulative production Life of reservoir

qt = Rate of production at time t

qi = Rate of initial production qec = Economic limit rate of production

D = Decine rate (decimal)

Di = Initial decline rate (decimal)

i t i

q t

q nD

 

=  ÷ −

 

For convenience, the probability axis may be split into three equal sectors in order

to be able to represent the curve by just three points Each point represents the average value of reserves within the sector

Again for convenience, the three values correspond to chosen cumulative probabilities (85, 50 and 15%)

Expected curve for discovery

23

Expection curve for a discovery

Expected curve for exploration

When an explorationist constructs

an expectation curve, the above approach for the volumetrics of an accumulation is taken, but one important additional parameter must

be taken into account : the probability of there being hydrocarbons present at all

Expectation curve for an exploration prospect.

24

Revenue items Expenditure items Gross revenues from sales of hydrocarbon Capital expenditure e.g platform, facilities,

wells (asssets with lifetime > 1year)

Tariffs received Operating expenditure e.g maintenance,

salaries, insurance, tariffs paid (asset with lifetime <1year)

Payments for farming out a project or part

of a project

Goverment take, e.g : -royalty

-tax -social contribution

PETROLEUM ECONOMIC

Project cashflow

Typical revenue and expenditure items

Project cashflow of a filed life cycle

25

Tax to host goverment

Revenue to oil company

Capital allowance + OPEX allowance Royalty

Fiscal allowance

Taxable income

royalty = royalty rate (%) * production (bbl) * oil price ($/bbl) fiscal costs = royalty + opex + capital allowances ($)

taxable income = revenues - fiscal costs ($) tax payable = taxable income ($) * tax rate

Project cashflow

Host goverment take

Split of the barrel under a typical tax and royalty system

26

Project cashflow of a filed life cycle

Assume that the only previous capex had been $120 m, spent in the previous year, with 25% straight line capital allowance, thus capital allowance in this year = 0.25 x $120 m + 0.25 x $80 m =

$50 m.

Revenue = Production x oilprice = 12MMbbl x $50/bbl = $600 million

Technical cost = CAPEX + OPEX = $80+$15=$95 Royalty = Revenues x royalty rate = $600 x 0.10 = $60 milion

Project cashflow

Project net cashflow

28

Fiscal costs = Royalty + OPEX + capital allowance = $60 million + $ 15 million + $50 million = $125 million

Tax = Tax rate x taxable income = 0.5 x $475 million

Project cashflow

Project net cashflow

29

Year Net cashflow

($million)

Dicount Factor (mid-year)

Discounted Cashflow ($million)

Project cashflow

Discounted project net cashflow

30

Oil price ($/b)

NPV under various scenarios

Project cashflow

Project net cashflow

31

If Z is some alternative; Y1, Y2, …, Yn represent a set of possible outcomes of some uncertain variable; X1, X2, …, Xn represent the NPVs associated with each of the possible outcomes; and P(Y1), P(Y2), …, P(Yn) represent the probabilities of each of the outcomes

EMV(Z) = P(Y1)X1 + P(Y2)X2 + … + P(Yn)Xn

EMV = (NPV success x probability of success) + (NPV failure x probability

of failure)

Project cashflow

EMV

32

Field is dry Field is a

Producer Drill -$250,000 $500,000

If you drill yourself, you take on the risk if the field is not a producer, but if the field

is a producer, you don’t need to share your profits with anyone If you farm out the drilling operation, you are not exposed to any losses if the field is not a producer but if the field is a producer, the drilling company will take the lion’s share of the profits

The probability of a dry hole was 65% and the probability of a producing well was 35%

EMV (Drill) = P(dry hole) × -$250,000 + P(producer) × $500,000 = 0.65 × -$250,000 + 0.35 × $500,000 = $12,500

Project cashflow

EMV

In this case, you should choose to farm out the drilling operation

EMV (Farmout) = P(dry hole) × -$0 + P(producer) × $50,000 = 0.65 × -$0 + 0.35 × $50,000 = $17,500.

34

From this expectation curve, if there are hydrocarbons present (30% probability), then the low medium and high estimates of reserves are 20, 48 and 100 MMstb.

PETROLEUM ECONOMIC

Exploration economic

Cumulative probability curve for an exploration prospect

35

36

PETROLEUM ECONOMIC

Appraisal economic

37

Probabily of success (POS) Volume of Recoverable Hydrocarbons

Risked reserves = POS x reserves

PETROLEUM ECONOMIC

Risk analysis techniques

38

40

ENVIROMENTAL IMPACT ASSEMENT

EIA Definition

EIA is commonly a legal procedure in which a project developer is required to provide enviromental information to a consenting body so that this information can be used for better informed decision making Usually also involves publication and public comment/ disclosure (consultation)

It is a tool to indentify potential envioroment impacts of a proposed project assess how significant (important) these impact are and recommend appropriate migigation, management and monitoring measures to prevent or reduce impacts

to acceptable levels EIA is a process and a tool to aid decison- making

41

ENVIROMENTAL IMPACT ASSEMENT

ENVIROMENTAL IMPACT ASSEMENT

EIA Process

43

CONCLUSION

In this project, we introduced three main problems that the decision maker will encouter when they want to make a good desicion The first problem is technical factor, we mentioned the reserves of reservoir, and express uncertainty though PDF and expected curves With each reserve, 1P, 2P or 3P, has probabilities respectively The decision makers base on that probabilities to determine which reserves will be choose to appraisal or development The second problem is economic factor We presented the important of project cashflow Depend on the project cashflow, the decision makers calculate the EMV and NPV of the project ad make a decision tree to present all the chance for each phase And the last problem is the enviromental factor Depend on the natural conditions of the country, the regulations of the goverment, the impacts of exploration and production to enviroment and so on the decision maker introduce the EIA report to make sure that the petroleum activities will work

fortunately and control the pollution

CHAPTER 1

[1] McGraw Hill Education, Decision Analysis [2] Steve Begg (2013), Decision making and risk analysis [3] Fiona Macmillan (2000), Risk, Uncertainty and Investment Decision-

Making in the Upstream Oil and Gas Industry

[4] Howard, R.A (2004) Speaking of Decisions: Precise Decision Language

Decision Analysis

CHAPTER 2

[1] Frank Jahn, Mark Cook, and Mark Graham (1998), Hydrocarbon exploration and production 2ndediton

[2] Reserves estimation From AAPG , http://wiki.aapg.org/Reserves_estimation

[3] Larry W Lake, Editor-in-Chief, Edward D Holstein, editor , Petroleum

Engineering Handbook Volume V

[4] Oil reserves , https://en.wikipedia.org/wiki/Oil_reserves

CHAPTER 3

[1] Frank Jahn, Mark Cook, and Mark Graham (1998), Hydrocarbon exploration and production 2ndediton

[2] Larry W Lake, Editor-in-Chief , H.R Warner J.R, editior, Petroleum

Engineering Handbook Volume VI

[3] Economic evaluation, http://www.mhnederlof.nl/economics.html#pv

[4] Expected Monetary Value and Value at Risk, https://www.e-education.psu.edu/eme801/node/578 [5] Net present value, https://en.wikipedia.org/wiki/Net_present_value

CHAPTER 4

[1] Frank Jahn, Mark Cook, and Mark Graham (1998), Hydrocarbon

exploration and production 2ndediton

[2]Craig.A Reid Partner (2014), Enviromental Impact Assessment (EIA) for

Oil & Gas and Power Project

REFERENCE

45

THANK YOU

46