Page 350 - Hydrocarbon Exploration and Production Second Edition

CHA P T E R 1 4

Petroleum Economics

Introduction and Commercial Application: Investment opportunities in the exploration
and production (E&P) sector of oil and gas business are abundant. Despite areas such
as the North Sea, shallow water GoM and the North Slope in Alaska being mature,
there are still many new fields under development in those regions, and new business
interests are emerging in South America, Africa and South East Asia. Countries such
as Russia and China have opened up their regions to foreign investment, driven by
the requirement for capital investment and technical expertise. Some fields which
have been producing for decades are being redeveloped using technologies such as
multilateral wells, which were not available during their initial development. With a
period of sustained high oil prices since the mid 1990s, formerly uneconomic
enhanced recovery processes have created interest in further investment, even though
the field is considered mature. Such ongoing opportunities all require analysis of the
attractiveness of the investment.
Development of an oil or gas accumulation is characteristically a high cost ven-
ture, especially offshore, and the uncertainties are large. A typical capital investment
for a medium-sized offshore oil field (say 100 MMbbl recoverable reserves) would be
in the order of one billion US$, and the range of uncertainty on recoverable reserves
may be plus or minus 25% prior to committing to the development. The result of
technical or commercial failure when the investment is so high is very significant to
most investors, who therefore expend great effort to understand and quantify the
uncertainties and assess the consequent levels of risk and reward in investment
proposals.
Petroleum economics provides the tools with which to quantify and assess the
financial risks involved in field exploration, appraisal and development, and is the
consistent basis used for comparing alternative investments. The techniques are
applied to advise management on the attractiveness of investment opportunities, to
assist in selecting the best options, to identify the financial exposure and to determine
how to maximise the value of existing assets.

14.1. Basic Principles of Development Economics

Sections 14.1–14.7 will deal mainly with the economics of a new field
development. Exploration economics is introduced in Section 14.8. The general
approach will be to look at an investment proposal from an operator’s point of view.
The economic analysis of investment opportunities requires the gathering of
much information, such as capital costs, operating costs, anticipated hydrocarbon
production profiles, contract terms, fiscal (tax) structures, forecast oil/gas prices, the
timing of the project and the expectations of the stakeholders in the investment.

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