Lesson 20-01-2025

Introduction of the course

1. Introduction to field development
2. International Petroleum Contracts
3. Economics of a field development
4. Project of risk analysis
5. 13 themes that affect the strategy of oil and development
6. Problems and mistakes in field development strategies
7. Examples of field development

Reference books
Possible books of consultation:

- The management of international oil & gas

- Project economics and decision analysis for oil & gas

Oil & gas well performances, field development, production optimization and
carbon management

Group works
a) Two homeworks: calculations on Excel about economics (2-3 lessons) and
risk analysis (3-4 lessons)
b) A study on an Oil Company and on a Field

The groups:

- At least 1 italian
- At least 1 foreigner
- At least 1 engineer
- At least 1 economics
- Max 1 petroleum engineer
- Maximum 1 energy engineer
- Energy engineers and petroleum engineer can’t stay inside in the same
group

The Oil Co must have working interest in the chosen field, not mandatory that
the company is the operator.

The field must be on stream at present.

References are to be reported in every slide.

Power Point slides max 8 slides for the company, max 8 slides for the field.
Back up slides: max 10. Study sent to the teacher before noon on February 17.

Presentation on February 19.

20 minutes and all speakers randomly chosen by the teacher at the moment of
presentation.

Field Development Strategy

In upstream industry, strategy means preparing a highl-level plan that
defines the macro decisions/actions to maximize the economical return
of the asset with the minimum environmental impact and within a
certain time frame.

The main goal of the field development is to maximize the economical return.
We have some economical indicators: NPV, IRR, etc. To choose if develop or
not, we look at these indexes.

Thirty years ago, the part of the definition related to the minimization of
environmental impact was not present.

Time is very important: perfect out of the time is bad. It is better being not
perfect within time.

Tens of years is the time related to a field.

We will see a structured methodology for field development.

13 themes that effect the strategy of oil and

development
1. Company Strategy: the strategy of the company, updated every year,
sometimes is not well known. For example, EXON Mobile decides to get
out from Gas in Ivory Coast or to buy another company, etc.  is very
important to know
2. Hydrocarbon Values: for Oil is quite obvious, but Gas depends on
where you are, how far are you from the market, etc. You have to
anticipate the values.
3. Export possibilities: how do you export? With a pipe, boat, truck, train?
Or you pass the crude oil to another company?
4. Joint Operating Agreement: physically it is a book where is written the
obligation of the operator and the obligation of the partners, interaction
with national companies, etc. It is very rare that one field is operated and
managed by a unique company. At least 2 or more partners is more
common.
 5. Farm-in Farm-out: buying companies, selling companies or a sector of a
company. In the strategy of field development is very important buying-in
and buying-out.
6. Environmental Constraints
7. Reservoir Uncertainties: reservoir is the major source of uncertainties.
You never know every data you would need for the all life of the field. The
reservoir is underneath, so you make tests, estimations, etc. And this has
a lot of implications on economics
8. Development Architecture: there are infinite ways to develop a field,
but you have to find the one who maximize revenues.
9. Technologies to be used: am I using the best technology to maximize
the economics of my field? Answering is not so easy. You have to
investigate inside the company, outside the company, etc.
10. Project Phasing: every project is divided into phases. Every phase
is coded.
11. Contracting Strategy: you use contractors to solve some
problems.
12. Stakeholders Management: people and entities that have some
interest in the field. It is important to keep fully informed the
stakeholders.
13. Risk Management: is a document where you list all the risks and
you have to offer solutions to alleviate them.

Stakeholder management is very often neglected. It could be the state oil

company, the minister of oil, partner companies, etc. Why this phase is often
neglected?

- It could cause time delays.

- Talking with stakeholders like environmentalist can be difficult.
- All other themes are technical, economical, etc. and has a direct impact
on the field development. Stakeholders management is something less
empirical and is considered less impactful.
- It could seem just a cost, without any economic return. If I involve the
stakeholders, I lose value to the project.

We are worried about stakeholders’ requests. You are a project manager, the
unique responsible of the project to the top manager of the company. So it’s a
risk for the project manager dedicate time and money for stakeholders  risk
to postpone the start of the production.
Introduction of field management
Oil and gas production cycle: upstream, midstream,
downstream
Upstream:

- Exploration
- Drillling
- Development
- Production

Midstream: transport oil to the client. We have two ways:

- Tank (from the sea)

- Flowline or Sealine

There could be also the possibility of trucks.

Downstream:

- Refining
- Marketing

Gas discoveries have different ways of transportation:

- Flowline or Sealines
- Tank
- Liquefaction Plants

Algeria in the 60s was the first country in the world building a liquefaction
plants.

Gas Power

- Regasification Plant
- Local markets

Why is upstream industry so complex?

Why the upstream industry is so complex?

- Reservoir and production rates of oil & gas are affected by

uncertainties. But why are there these uncertainties?
o The technologies and processes used for measuring and find the
fields are full of uncertainties.
o You study and you have data of a small area and you extrapolate
data for all the reservoir.
o Even if you are sure of the presence and the extension of the
reservoir and we develop  in every phase there will be
uncertainties.
 o The fact that the reservoir is non omogeneous is the main
problem.
- Reservoirs largely present in areas politically unstable. The political
risk must be taken into account
- CO2 emissions and climate change aspects must be anticipated.
- Not only the reservoir itself is a source of uncertainties. Oil & Gas prices
are unpredictable. If you don’t anticipate for the next 20 years, you will
not be able to develop economic studies about the field.
- Upstream projects costs are very high. Accident, geology different from
what you predicted, can highly change the costs.
- It’s the most multidisciplinary industry
- It is technically complex

From exploration to the market: main activities

We have three macro phases of upstream:

- Exploration: at a certain point there could be a discovery well. The

probability of discover a field worldwide is a bit more than 1/3.
- Development: at the end of development you have the field start-up.
- Production

Upstream industry is present in variety of environments

For example:

- Deserts
- Artic
- Forest
- Antropic areas
- Offshore

Definition of reserve of oil or gas

Definition of reserve of oil or gas: quantity of energy sources estimated
with reasonable certainty (>90%), from the analysis of geologic and
engineering data, economically exploitable today with the current
technologies.

So, reservoir is a part of the accumulation of oil and gas, which is more or less
dependently on economical and technological

The reservoir changes through the time! Because of oil and gas prices
change during the time.

Oil & Gas price affects the reserve.

Average duration
- Basin assessment
 - Exploration
- Development
- Production

TIME IS MISSING.

Cumulative Cashflow
We have to build the graph where we anticipate the cumulative cash flow.

During the exploration we have only cash out (negative). In the development
too, we continue to spend with an higher slope.

When you start producing, the algebrical addition cash-in cash-out cause a
cumulative increase.

The payout time is the time in which you reach the zero of the cumulative
cashflow.

There’s also the abandonment phase, where you don’t produce and you spend
money.

Some numbers
Reserves per field, average: 10-200 Million boe

CAPEX avg: 40-50 $/boe

OPEX avg: 6-12 $/boe

Barrel Oil Equivalent = is a quantity of energy 41,868 GJ.

3
1 barrel of oil equivalent=1 BOE=164 S m of gas

Example
A middle size filed: 50 million boe. Has a:

- CAPEX of 1 billion $
- OPEX of 0.4 billion $.

Project of a field development: main phases and duration

The exploration is before. If you start development, you have already found oil.

On average 7 years to develop a field. There are fields developed in 2 years,

other in more than 10 years. We have to know the important of Gate 3 (G3) in
which there’s the FID – Final Investment Decision (Board of Directors),
and you need the approval of them.
When all the books are ready, you are ready for the executions. For small
projects there could be just the CEO with his collaborators.

Typical production vs time of an oil or gas field

All the fields, gas or oil, have this behaviour over time. In our business, the unit
of time in making any estimation is the year.

We have First Oil: the year where you open the wells and physically the oil go
to be treated and go to the client.

We have then the Ramp Up: is impossible going from one day to another to go
to the maximum of the production.

Sometimes we have plateu, for large fields (2-3 years).

Then there’s Depletion until the Abandonement. The abandonement is

under the Minimum Economical Production of oil or gas (cash out is higher
than cash in).

Cash out of a field can be the salaries of the workers, the costs of electricity,
chemical products, maintenance, etc.

If the cash in is less than cash out we will abandon the field. It is highly
dependent on the price of oil!
Value=Oil ∧Gas production of theday∗Oil price

Reserves is the part of the physical accumulation that life-cycle you produce
with the technology of today and the prices today.

If the price of oil collapse, the abandonment moment will be anticipated.

There’s a not written rule. Since these numbers are related to the markets, we
need to certificate the reserve.

In order to avoid that the executive of the company overemphasize the future
production, there are Certification Companies. They are private companies
which certificate the documents with the estimations.

The reserve of the field is the area under the Oil or gas production
line.

If you predict a raise in oil & gas prices in the next months, you can produce in
some months under the Minimum Economical Production.

Every years these documents are updatetd.

Example of Hawa Field in Tunisia

The real trend is always different from the ideal. The good practice is remaking
the exercise every year: water, gas and oil.
Gas production trend is different from the oil.

- If I am oil well and the gas is dissolved, I want to produce oil.

- When you produce oil, the pressure decreases. When you depressurize a
lot of gas come up!

Fracking is frack the rock to cause a fissure (more permeability  more

production).

Black trend -> normal production

Colour -> production characterized by fracking

Shale is “argilla”. It is porous but with very low permeability, so you have to do
the fracking.

Production plateau and decline production

The exponential decline

Every year you lose the same percentage. If you have a constant percentage of
reduction of production,  you have an exponential decline. It is an
empirical rule, coming from the practice.

The same reserves can be produced either with the plateau or without. The
area under the curve will be the same.

Only economics tell you which the optimal trend to follow is.

The cumulative production is obtained integrating the production.

dN
=Q
dt
−bt
Q=Q initial∗e

( 1−ebt )
N=Q initial
b
To use this formula you need field data, at least on short term production.

Examples of field development

The simplest is a field with only 1 well and you branch a successful
exploration well to an existing oil & gas plant. Range of costs: 10 M $.

The most complex develop a gas field in ultra deep water by the use of a
gloating liquefaction plant. Range of costs: 10 B $.

The world record on CAPEX (according to public data): about 40 B$.

Kashagan (Kazakhstan) and Gorgon (Australia).

When they prepared the strategy, the cost forecast was 50% less. It is a unique
a plant in the world.

For example re-injection of H2S was never done. Some contractors in the world
were requested to build compressors for miscellaneous with 30% of H2S.

Caspian Sea is a lake and the water depth is on average 3 meters. When
there’s stormy weather, also 1 meter. So it’s very difficult to move the vessels.

Gorgon was the first field where carbon dioxide was captured and re-injected.

Another reason because the more the complexity, the more the risk.

We have a logarithmic trend for which risks and costs go to infinity if the
complexity goes to infinity.

For Fusion commercial reactor there’s a forecast about 2035. But this forecast
is too optimistic, because ENI + MTI fusion reactor is

When you are first of all in doing something, you can’t anticipate what will
happen.

Fixed platform
The simplex fixed platforms: < 20 water depth. We can see them near
Ravenna.
A very complex offshore field in the world: Ekofisk in the North Sea.
 International Petroleum Contracts
Introduction
Some international petroleum contracts, for some countries, are on the web,
other no. Taxation is a very important point.

Each country has its level of taxation. The level of taxation of one country
depends on this key question: is it easy to find and develop oil in that
country?

If I drill a pure exploration well, what is the probability to find the reserve? Are
there already good contractors in the country?

Poland is one of the most important producers from coal. When there was the
opportunity of fracking, Poland opens the opportunity to open for shale oil. All
the major players entered, but abandoned Poland in few years.

Poland made a big mistake because without knowing how easy was to find oil
in Poland, imposed an high level of taxation. They had to impose very low
taxes, then discover how easy was to find oil and after having the result 
renegotiate about taxes.

International Oil Company vs Host Country

Why will a company invest in petroleum exploration host country?

- Discover hydrocarbons resources and “book” the relevant reservers.

“Booking reserves” is finding oil and finding the reserves in the book. The
target of a company is at least adding reserves equal the reserves
produced in the year; otherwise the reserves go down (very bad signal to
the share market).
- Obtain a reward appropriate to risks incurred and investment made. We

Why will a host country welcome foreign company investment?

- Share risk in developing hydrocarbon resources. There are some

occasions in which national companies do all the exploration by itself.
- Generate cash flow to favour economic growth & infrastructure
development.
- Develop expertise & experience. Using international companies to import
expertise  a chapter of petroleum contracts often has the obligation to
form new technicians, managers, etc.
The basic contractual scheme
- Concession Agreement: is the oldest type of contract and the easiest.
In this contract, for a certain period, the international company is fully
owner of the reserve. Duration is usually 15-25 years. At the end of the
period, if you have additional reserves still you have to renegotiate the
terms of the contract. In other word, direct title (pr
- Production Sharing Agreement: the physical oil and gas belongs to
the government. You get some oil and gas to repay investments,
remunerate the investment.
- Service Agreement: international company is treated as a pure
contractor. Government maintains title to production, IOC (Service
Contractor) is paid out and remunerated in cash or kind by a fee per
barrel.

IOC don’t like Service Agreement, because some time ago was not possible to
book the reserves under Service Agreement. Today is possible, but PSA are
always preferred if Concession is not desired by the government because
international oil company is often involved also in midstream and
downstream  they prefer to receive crude oil instead of cash
because they are able to make money from it thanks to having the full
value-added chain. (Gio, the poet)

Concession Agreement: key feature

The government grants a Concessionaire the rights to conduct petroleum
operations and direct (equity) title of hydrocarbons found and produced.

You pay an Annual Rental Fee in cash, based on the size of Concession area

Royalty is a part of production that goes directly to the Host Country. This can
be done in two ways:

- Kind: I physically transfer part of the oil in a storage belonging to host

country.
- Cash: I take all the oil, the money you have gained go to the final direct
ministry. Calculation is made looking at the oil price, not on daily basis
(average in trimester, semester, year, etc.). There are some exceptions,
with mathematical formulas to correct the price (especially for the gas),
each country has its formula

Profit Tax. Out of the Royalty, there’s also the obligation to pay Profit Tax.
There can be also the obligation to sell the oil to local buyers.

NOC (National oil Company) usually does not participate to

exploration risk activity.
It enters only in case of development, repaying its share of exploration
investments during the production period, giving to the IOC part of its share of
petroleum produced.

Even if they stays out of the business, in average, 70% of the revenues stays in
the country. If they decide to enter, they have to repay the costs of past
exploration. They can decide also the share with which they enter in the Joint
Ventures.

Economics of oil & gas field development

Most important economic indicators are:

- Net Present Value (NPV)

- Internal Rate of Return (IRR)

Cash flow per year: Cash in – cash out

Revenues is the money that enter in the company. It is simply:
Revenues=Production × Price

We have to subtract Royalty. It is a fixed % of production (cash or in

kind), usually from 0% to 20%.

Some countries they can reduce Royalties to zero for those fields that are very
difficult to exploit.
Revenues−Royalty+ …

Then you have to remove the CAPEX:

- Drilling
- Construction
- Lay down of pipelines
- Building the infrastructure of offices, etc.

CAPEX is related to all the activities performed before the production.

Revenues−Royalty−CAPEX +…

Once you start the production, there’s the OPEX (Operating Expenditure):

- Fixed opex (personnel)

- Variable opex: workovers (maintenance of wells), chemicals,
transportation costs.

Chemicals are needed to avoid blocking the transport (precipitation of

something). The oil, changing the thermodynamic conditions through the
transports  this can cause the precipitation of paraffins or inorganic
deposition (sodium chloride, calcium chloride, calcium carbonate).
 Gross Cash Flow=Revenues−Royalty−CAPEX−OPEX

If the algebraic operation is negative, you don’t pay taxes. In the first years this
is always negative, so you don’t pay taxes.

Then you must pay taxes:

Net Cash Flow=Gross Cash Flow−Taxes

Abandonment is an investment too and must be taken into account.

If the contract expires before you close the well what happens? It happens very
often, and reserves are lost for the IOC. The host country is interested that
you continue, so it renegotiates the terms of the contract.

Net Present Value (NPV)

Net Present Value (NPV) converts the future NCF for an investment opportunity
into an equivalent value at the present (or year zero).

It is the summation of the Net Cash Flow every year, discounted.

Discount is the change of the value of the money vs time. I give you money: do
you prefer a euro today or a euro next year? A euro today obviously. Do I prefer
1 euro today or 1.2 euro next year? We are not certain about it, because we
can choose to receive the 1 euro today and invest it maybe giving it to the
bank.

Discount Factor is:

1
DF =
( 1+WACC )t

- WACC : weighted average cost of the capital

This is a factor used to bring back a cash flow for a number of year equal
to time .

Is very similar to interest rate, but in the formula we have other factors. It is
calculated by finance department. In oil and gas we have:
WACC =9−12 %

WACC depends on the debts, money, equity, etc.

The Net Present Value is calculated as:

T
NCF ( t )
NPV =∑
t=0 ( 1+ WACC )t
Internal Rate of Return (IRR)
The Internal Rate of Return (IRR) is the percentage return that an
investment opportunity is expected to yield over its life.

It is mathematically calculated as:

T
NCF ( t )
NPV =∑ =0
t ( 1+ IRR )t
NC F 0 NC F 1 NC FT
0= 0
+ 1
+ …+
( 1+ IRR ) ( 1+ IRR ) (1+ IRR )T

Is the WACC that gives NPV equal to zero.

It is an indicator of resilience of the project. IRR must be higher than WACC,

otherwise we will have a NPV < 0  we will lose money. It is an indicator of how
good is the project.

The more you are above the WACC, the better is.

Example
Cash Flow Cash Flow
Year
Project A Project B
0 -1000 -10000
1 450 3500
2 600 4500
3 750 5500

Project A Project B
NPV 447 985
IRR 33% 15%
Which project is better?

Let’s suppose that my attitude in taking risk is very low. I don’t want risks,
because company is near bankrupt. In this case, project A is highly better.

It depends on the aversion to the risk, subjective but linked to the strategy of
the company or the financial position of the company.

Present Value Ratio PVR

PVR (or PV ratio) measures the net present value of a project and compares
it to the present value of Capex:
NPV
PVR= T
CAPEX ( t )
∑ (1+WACC )t
t =0
Unlike NPV, by measuring profitability per dollar invested, PVR allows to rank
both large and small projects in order of profitability.

KPI (Key Performance Indicator) is an indicator of performance of whatever you

want.

So, the PVR is the most appropriate index to measure the profitability of a
project in cases where more investment opportunities (of different size) are
available.

Pay Out Time and Maximum Financial Exposure

The Pay Out Time is the period of time necessary to recover completely the
costs. The Cumulative Cash Flow (better if discounted) at the P.O.T. is zero. In
Oil & Gas we have 6-7 years in average (it can be 12 or 2).

The Maximum Financial Exposure defines the maximum (negative) value of

the cumulated cash flows of the project.

Particularly important for evaluating investments in risky countries because it

describes the maximum loss if the project is suspended before the start-up.

But a question arises: if the costs arises unexpectedly and the POT is delayed
over time, you can’t close the project. The major problem could be a decrease
in Oil and Gas prices. You stay there, you modify, wait for increase in Oil & Gas
Prices, cut costs.

Capex Unit
It is the investment per every barrel produced.

( Capex +Opex ) @WACC $

CWP= =
Production Profile @WACC BOE

It is a measure of technical costs, which is not affected by prices and fiscal

parameters. It is useful to compare the technical performance of different
projects. It is useful for benchmarking: comparing with average and with the
best in class. CAPEX unit in Indonesia is around 20 $ per Barrel.

You have to discount both Production, Capex, OPEX.

Then we have:

CAPEX unit cost = CAPEX / Reserves

OPEX unit cost (yearly avg) = Operating costs / (bbl produced yearly avg)

Abandonment costs
Abandonment costs include all the expenses required for decommissioning
the area physically touched by the oil & gas project.

220 million dollars just to remove floating platform in the North Sea.

In the economy of the project is a minor project, because is far in the future
and when you discount the effect decreases.

Sensitivity Analysis
Due to importance and uncertainties of economics calculation, it is common
practice to carry out the sensitivity analysis.

It means recalculation of economic indicators by changing some parameters:

one at time or all by using Monte Carlo probabilistic method.

Example of parameters to be changed:

- +/- 10% CAPEX

- +/- 10% oil price
- 1-year delay of first oil (that causes a reduction of NPV by 5-30%). The
money spent at the beginning of the project has a strong weight in the
project!

Numerical Exercise
- 400 bopd in the first day
- 200 bopd in the second year
- 50 bopd in the last year

Data

- The investments take place in the current year (y=0)

- CAPEX = 3 million
- Abandonment costs in the last year of production = 2 million $
- Oil price = 60 $
 - Opex = 7 $/bbl
- Total Tax = 50 %
- WACC = 9 %

Results:

IRR = 56% way bigger than WACC (9%)  very convenient.

But are we sure that this is CAPEX? Usually, the interventions have OPEX not
capex. There are special interventions not in the same reservoir, and in this
case you don’t account this like OPEX but as CAPEX.

Depreciation or amortization in the economics

Internation Accounting Rules allow you, in the economic calculation, to
distribute the CAPEX through the years in order to pay less taxes.

If you distribute the CAPEX through time, you improve the economics of the
field.

Example
How many years you distribute the CAPEX? It depends on the kind of the
CAPEX  there’s a table which explains this (5-12 years).

It’s important to add a column (CAPEX Depreciated) because to calculate Net

Profit we remove from the revenues not only OPEX but also CAPEX Depreciated.

Example of economics of an oil field

development
Down Town: when you have to stop production for any problem. We have a
value of 0.02%.

Rate Decline: 0.15.

When the rate decline is constant, the reservoir level has an exponential
decline.

Se abbiamo una crescita esponenziale di uno stock dove c’è un inflow del tipo:

inflow=k∗y ( t )

Quindi abbiamo:
y t
dy dy dy
=k∗y ( t ) → =kdt →∫ =∫ kdt
dt y y y t 0 0

y
ln =k ( t−t 0 )
y0
 y
=e ( )
k t −t 0

y0
k ( t−t 0 )
y= y 0 e

Supponiamo che t 0=0 . Quindi quando abbiamo un parametro che sta crescendo
esponenzialmente nel tempo con un tasso di crescita costante:
kt
y ( t ) = y0 e

To pass from the daily production from the yearly production we have to
multiply by 365 and by the downtime.
Q y =Q d∗365∗DT

Period of 7 year of amortization starting from the first year of production.

Send everything 6 PM the day before martedì.

Project Risk Analysis
Big data means capability to handle data in order to add value to the
company. You use data, you elaborate them and create value for the project,
for the company. Any time you make elaboration for understanding better, you
create value for the company.

All international companies, from February to may, do a presentation to the

financial community to communicate how they closed the year and the
forecasts for the future. If the presentation is below the expectation of the
community, stocks go down; otherwise, they go up.

Analysts are not engineers, so they don’t know too much about the nature of
the risks. In oil & gas you don’t have all the data for doing all the calculations
so there’s a risk.

Risk is the combined effect of the likelihood of an occurrence of an

undesirable event and the severity of its outcome.

Mathematically risk can be expressed as:

Risk=Probsability of occurrence of event × Consequences

So, to reduce risk I can:

 Work in probability: prevention

 Work in consequences: mitigation

For example: average oil price 2025 decreased by 20$/bbl vs best forecast. We
estimate a probability of the event = 30 %. Consequences: lost of net return of
100 M$ of a certain gas project.
Risk=0 , 3∗100 M $=30 M $

The risk is to lose 30 M $ . This are risked money.

E&P: uncertainties and risks

We talk about probability of an occurrence because we are not certain
about the occurrence.

E&P deals with a lot of uncertainties that ultimately are the causes of the risks:

- Technical
- Economical
- Commercial
- Political
All four are in a development project. Usually E&P development project, as a
whole, considering all uncertainties have probability 50-90% to get the return
approved by the board (FID).

Return of E&P projects: IRR is normally in the range of 12% and 20%.

The CEO of ENI assessed that IRR of ENI

Onepetro contains all the papers dealing with oil and gas published in the last
sixty years. Searching papers with the word “uncertainty”, there’s an
exponential positive trend! In literature, more and more attention is dedicated
to uncertainty.

The more the uncertainties, the more the risk. Is impossible to eliminate all
the uncertainties.

Any action to reduce risk has a risk, starting from wanting more information.

The probability is ratio between expected events / total possible

events.

Two ways for approaching risk analysis

In field development we can manage the uncertainties in two ways:

- Deterministic with sensitivities (what if) analysis

- Probabilistic
o Decision tree analysis
o Monte Carlo analysis

Deterministic approach
Drilling, facilities, procurement, project management and economics: use
commonly deterministic approach. To understand the role of uncertainties
the sensitivity analysis is used.

However, in making sensitivities only one variable at time is varied to see how
it affects the function objective, maintaining the other variables constant.

This exercise is straightforward but is a simplification that could heavily affect

the results because it doesn’t consider the interdependence of the
variables!

Probabilistic approach
Stochastic approach honors all the information available. In case of available
data about important variables (for example one that affects strongly
economics), the deterministic approach uses the arithmetic average.

For example, the duration of the project is a parameter that influences

heavily the economic of the project.
Suppose we have a project with a lot of uncertainties, and we search for similar
projects. Let’s analyse two possible situations:

- We have info about six projects: 39, 45, 62, 56, 64, 70 months.
- We have info about six projects: 53, 53, 54, 54, 55, 55 months.

Both have the same average: 54 months.

In the first case is useful to do a probabilistic analysis.

Deterministic approach
Most common approach, easy and fast.

Variables are numerical values

To consider uncertainties, NPV is calculated varying each uncertainty by (+/-

10%).

The limitations are:

- Difficult to consider the variation of input variables at the same time

- The range of variations of the variables cannot be taken into account

Scenario/sensitivities/what if analysis – Spider plot analysis

aaaaa

Calculation of probability
Probability distribution can be:

- Discrete (a number)
o Binomial
o Poisson
- Continuous
 o Normal (Gaussian)
o Lognormal
o Uniform (rectangular)
o Triangular

How to use probabilistic curve

When you have any probabilistic curve, the probability is part of the area under
the curve.

Probability that occurs an event less than X :

Dashed Area
P ( x< X )=
Total Area

We have on the x axis reserves in million barrel.

Reserves of a field are expressed with this probabilistic curve. Mean is 14 Mboe
and SD is 6 Mboe.

How to build the probabilistic curves

We should start from the function Frequency of Excel.

For example, we have twelve data of heights of people inside the room. I want
to build the probabilistic curve. I start from an histogram built considering a
certain largeness of bin and counting how many observations fall inside each
bin.

There’s the mathematical formula “Frequency” in excel.

Errors with triangular distribution. In choosing the limit for the triangular: these
graphs would be perfect if I would have infinite experts.
We have to be careful about the physical meanings of data: e.g. a temperature
less than -273,15 °C is nonsense.

In using triangular distribution is a good practice to consider a little bit less

than the minimum and a little more than the maximum.

IRR of a oil & gas offshore development in Asia

Project A has a a NPV mean of 225. Project B have mean 250. At a first glance
project B could seem better.

It depends on the risk profile: are you adverse or pro risks?

Because NPV of A is

Flatter is the curve, less resilient is the project! The best option we could aspire
to is a straight line!

Red is better than blue!

What is the limitation of the probabilistic approach? The availability of data!

And then also psychological aversion. People prefer choosing among options
comparing numbers rather curves.

In Upstream Industry what’s really the value of

the time?
Maximum explorations wells 6 wells for giant fields.

Decision tree analysis

A visual method based on the problem breakdown and fixed probability events.

This graphical method allows to quantify the NPV of the possible decisions that
we have to take. The technique uses these symbols to build the “tree”.
 - Decision point (Square): a point of decision between options (at least
2)
- Change point (Point): a point of possible occurrences (at least 2) after
a possible action/decision
- Stop point (Triangle)

For example: what’s the best decision? 1 or 2?

Decision 1 has the 2 possibilities:

- A with probability y %
- B with probability 1-y %

Example in the world of drilling.

Expected Monetary Value of a chance = NPV of that branch *

Probability of occurrence

Expected Monetary Value of Decision 1 = EMVa + EMVb

 Lesson 31-01-2025
Introduction
Do we have to drill an additional “risky” well in a flank of a producing reservoir
in order to increase field NPV?

We know that cost of the well + total taxes = 15 million $. Additional reserves
would be 0,8 million bbls. Oil price is 50$/b, probability is 40%.

Decision 2: no drill, zero costs zero increase in NPV.

Then there’s Decision 1: drilling. We have:

- 40% success
- 60% failure

In chance A of success we input costs and added monetary value due to extra-
reserves. In chance B we put just costs.

Doing:

10 M$ - 9 M$ = 1 M$

It seems better than zero, so there could be the decision to drill. But this
increase in NPV is so small that it is not enough to cover the risk of losing 15
M$!

In order to operate this difference should be very high!

It could be useful to do sensitivity analysis about probability of different

cases.

Exercises 3, 4, 5

Unitization
If A is owner of the area (A), then you should get some production. B often want
to demonstrate that area A is not so good, so if they produce in area B they are
taking oil only from this part and not from A.

Often they go to a third party to define the percentages of production which is

for A and the production which is for B.

Operator A to demonstrate they have something they need to drill a well.

Monte Carlo analysis

Monte Carlo was invented by Enrico Fermi.

The function objective of the problem is calculated in term of curve of

probability.

Normally such function, in field development, are:

- NPV
- Costs
- Production rate
- Reserves
- Project duration

The input variables for the calculation that are uncertain are expressed with a
probabilistic curve. Function objective is obtained by a large number of
combination of input variables randomly chosen.

The curve exhibits on average value, a standard deviation and two extreme
values relevant low and high probabilities to have the value.

1.000 times and better 10.000 times variating randomly input data.

Methodology
You have the input data x and z that are probabilistic curves, you combine them
through an algorithm, and you obtain a new probabilistic curve, characterized
by p 10 , mean, p 90.

Our algorithm is able to calculate area of the room starting from side A and
side B, both probabilistic curves.

The algorithm is A∗B

S=f ( side A , side B )

We obtain a new probabilistic curve.

The principle of Monte Carlo analysis is: many sampling randomly chosen
honoring the probabilistic curve.
From density of probability, we pass to cumulative. How do we choose every
run of calculations (these 10.000 inputs).

You have to generate numbers in a random way, is possible to do it in excel

(Random , Casuale) in the interval you want.

You obtain a random number between 0 and 1, I find a number I put it in F-

curve and I obtain an X value correspondent to this F(X).

In this way I oblige that all the random choices honor the gaussian shape!

But if I have this cumulative distribution:

Is clear that I will obtain always 9 m.

Inverse Function in Excel is useful for this purpose.

We must be aware that generating random numbers in a distribution, some -

infinity to +infinity numbers will be provided. Be careful to maintain just the
physical-sense numbers.

Optional: explain in few words what Delphi method is.

Original Oil in Place

What is the physical accumulation of hydrocarbons?

OOIP=GBV ∗NTG∗Φ∗( 1−Sw )

GBV : Gross Bulk Volume (Geometric), volume unit, for example m3

NTG : Ratio net reservoir/Gross reservoir thickness

Φ: porosity, fraction (between 5-30%)

Sw : saturation (10-12-15%)

In this poor often there’s water, because migration of hydrocarbon displaced

water originally in the rocks.

In the porous there’s always a bit of water, remained after the gross of water
was displaced.

Real case about OOIP calculation with Monte Carlo.

Let’s suppose we have:

GBV -> normal distribution

NTG -> triangular

PORO -> rectangular

Accumulation that have the probability of 10% is the P10.

For the exercise:

Efficiency of boiler: 85%.

In decision tree analysis

Strategy: the meaning is not very precise

It is a book where all the issues are treated. It is a high-level plan to achieve
goals under a certain uncertainty.

Usually the function objective of an oil&gas field development is the

maximation of economical return, IRR and/or NPV, within a certain period
of time: duration of the petroleum contract.

There’s an exception: in some countries the goal of Government could be

maximation of hydrocarbon recovery or having a long production plateau.
In any case, once the goal is clear, strategy means pursuing the objective
defining a high-level plan in terms of resources, key decisions and
actions.

Analysis of 13 blocks
Company strategy
All international companies are in the market, very interested in
communicating strategies to the financial community.

Why do we have to know the mission strategy of the company?

- Because the project development strategy must be aligned with the

company strategy
- If not, the project will be probably stopped or will be affected by delay

There are some mandatory investments that are only costs.

Careful, it is wise to know also the strategies of the partners and the hosting
country.

Strategies and priorities of the oil companies are described (NOT ALWAYS
CLEARLY!) in the Strategy Presentation that the oil companies usually
launch in the first quarter of the yea.r

You can find them in web site of IOC (Intern. Oil Co): usually in the section
“investors relation”.

If you don’t present projects, the reservoirs go down  investors remove

money from your company.

Fossil fuels value

Possible upstream products: oil, dry gas, LNG, GPL, condensates.

Prices of liquids usually are not dependent of the clients and through the field
life they can be easily sold to various refineries over the world.

Dry gas, can have two cases:

- Field is close to existing as network: in such case investments for gas

transport are limited and the gas contract with the buyers has minor
risks.
- Field is away from the market. The investments for pipes and
compressors are high and to guarantee the return of the business we do
need good prices and reliable client (or clients). The search of the clients
and the definition of the prices could take also years.

LNG is MISSING****
Example
1 km of flow line laid down in the desert costs 500.000 ÷ 1.200.000 euros.

If you delay the startup the today value goes to zero.

 Lesson 05-02-2025
Prices forecasts
Decisions of OPEC and USA influence the price of oil, only in the short term.

Private companies must maximize the revenues.

Saudi Aramco is the uniqye company in the world that can really affects future
oil prices.

Gas price is linked to oil price, but there are more variables. For the gas, you
look always for a client to have long term contracts.

During negotiation with those clients, you can negotiate a price linked to the oil
price but also other parameters (where you are, country where you sell the
gas, etc.).

For example, gas price average in 2016 was 2-4 $/MTBU in US and 10-14
$/MBTU

While oil price is the same all around the world, not too many differences.

Oil and gas prices: the dynamics

The average duration of a life of a field is smaller than the length of the
fluctuations of the oil and gas prices.

Basic issues for Oil Companies when deciding

to invest
Contract Stability: the fluctuation are smoother because linked to other
parameters.

Full Cost Recovery Principle

Risk/Reward Balance

IOC are obsessed with booking reservers: they want to maintain constant the
reserves in the book. It is a bad signal if the reserves of a company go down.

Right to export production

Oil valuation

International Arbitration
Forecast is always a risk
Oil & Gas prices are the biggest uncertainty in the economic evaluations. It is
important to declare the oil price!

Risk is a magic word for all the evaluations!

Analysis of the past prices of gas

Concerning the reliability of a company.

What can we do to infer the reliability in the forecast? We should evaluate the
reliability of the past reports!

Reality is in red; forecasts are in grey line. The differences are huge.

Upstream costs scalation

If follows roughly the real oil price.

Price forecasts, is there a strategy?

Be very prudent. There could be clashes between companies in the same Joint
Venture, because of different price of oil forecasts.

For example, company B will have an higher NPV in their report because they
expect higher prices in the following years.

Export possibilities
Moving possibilities of hydrocarbons are very important.

Especially for remote gas. In the world there are hundred of stranded gas field
not exploitable because of the cost of gas transport (pipe or LNG). Some of
these fields have more than 100 M BOE technically exploitable.

Surface processing and exporting: in hour or leveraging on third parties?

The first thing to analyse is: are there near facilities that can take my oil and
gas? You leverage on existing facilities paying a fee per barrel of oil processed.

You could also build brand new facilities, but is more costly.

You have 5 possible schemes:

- Raw oil (untreated), you pay a fee to another operator for treat and send
to the market your oil
 - Reservoir and Oil treatment centre and storage: you treat your raw
oil and exploit an already existing pipeline, so you pay a fee for the
transportation
- Reservoir -> Oil treatment centre and storage -> Pipe or trucks (rare) or
train (very rare) -> Refineries
- Missing

You can’t store the gas if you don’t liquify it.

For gas we have 6 schemes:

- Equal to oil
- Equal to oil
- Gas to wire: Reservoir -> Gas Treatment Centre -> Power Plant
(electrical energy)
- Reservoir -> Gas Treatment Centre -> Liquefaction plant (LNG) -> LNG
tanker -> regasification plant. This is justified only for giant fields
(decades of constant gas production).
- Reservoir -> FPU Floating Production Unit -> Liquefaction Gas Plant ->
LNG tanker -> Regassification plant

Joint Operating Agreement (JOA)

It is a book of the rules. Duties and obligations. Companies stay In joined
ventures to reduce the risks.

In Joint you have an operator and the partners. The rule of the operator and of
the other parties are very well described in the book.

The tendency of the operator is to have a small book, for the partners a big
book (more rules more obligations).

Operator has usually the maximum shares.

TECOM Is the technical committee meeting and the OPCOM is the operating
committee meeting.

Usually, decisions are taken on the basis of majority.

Sole risk: sometimes the operator wants to drill an additional well and the
partners don’t agree. In the JOA is written that the operator can continue in
sole risk and sole reward. I pay 100% by me the additional well, if the well is
unsuccessful I lose the money. If it is successful, if a partner want to enter and
get the additional benefit it must pay 5-10 times of the costs of the additional
well.

Activating a sole risk is a bad sign.

Farm-in Farm-out
Farm in means the entrance of a company in a consortium that already exists,
by buying the shares of a partner.

Farm out is the opposite: exit from a JV.

For the operator, farm in is not so a good thing.

If I’m a strong operator in an area, is easy for me to farm in in a new project.

Preemption
If a partner want to farm out, before selling shares to other companies outside
the JOA, you have to go to other partners and do the same offer. This is not well
defined, so there could be some problems.

Example of farm-in farm-out effects

Apache farmed in 100% the Forties field from BP. Cost of operation, 2003,
about 800 Millions $. Production doubled in a few years.

Big International companies have big fixed costs, so for this reason BP operator
decided to farm out.

Dealing with a small field (like this in the end of life) for a small company the
opportunity the production means improving the reserves in the book of a lot!
Whereas for BP, increasing this more is not so much.

Another reason is that small operators can be less careful about HSE! This is a
bad sign.

Environmental constraints
Some years ago 12 largest oil company in the world decided to constitute a
consortium to coordinate internal efforts in terms of carbon management.

OGCI Oil and Gas Climate Initiative.

Sources of greenhouse gas from oil&gas industry.

- Combustion products (flue gas) that contain on average 3-10% of CO2,

from the power generation systems.
Capturing CO2 from a flue gas where the percentage is very small is very
difficult and costly.
- In the specification of the gas for the client, CO2 should be 0.5% and less.
- There are some gas reservoir where carbon dioxide is more than 50%. For
example in Puglia there’s a power plant with in input a gas with 20% of
CO2, then the flu gas will have even more percentage.
 - Fugitive is escaping methane. 1 CH4 equals to 25 CO2 in terms of GWP.
Joints are the main problem for CH4 emissions.
- Gas flaring. It is the gas associated to oil that is flared because it is not
economically convenient to transport it to the market. Flaring is
decreasing rapidly (in the period 2006-2016 Eni has reduced the flaring
by more than 70%). Flaring is nowadays no accepted in the new
developments.

Nowadays, or you sell gas to the market, or you re-inject. No acceptance for
flaring, for new plants.

CCUS
Today cost of CCS is above 70$/ton CO2.

Maximum 10% of the world produced CO2 can be abated through CCS.

KPI indicators
Energy Intensity (EI): ratio between energy consumed and energy produced.
Gjoule/toe.

Average EI of upstream is around 1.5 GJ/toe.

GHG Intensity: ratio between all GHG emitted in tons CO2 equivalent and the
produced hydrocarbon. Ton CO2 eq/ kboe.

Average GHG intensity of upstream is around 20 ton CO2 eq/kboe

Water
Water is an issue concerning field development.

There are limits about the separator oil, gas, water.

The separated water from the separator, has some droplets from the gas and
oil. We can discharge, but the limit is between 4-20 ppm.

Re-inject gas requires 300 bar of pressure, while re-inject water 50 bar is
enough. Then for the same delta P, liquids need less work than gas because of
the smaller specific volume.
 Lesson 07-02-2025
Social constraints
When you enter in a new area, you must be aware that people could be
adverse on what you are doing. For example, you pay a country and some of
the population maybe must move.

In Ghana, the union of the fishermen was against drilling operation.

For example there’s a widely spread aversion against fracking, like in UK. In
USA it is widely spread. In 2005-2006 they were not so able, now they’re
accurate when they plan the fracking intervention. You need to know well the
geology; you can’t frack near an aquifer for example.

Without fracking USA would not be the first oil & gas producer of the world.

Reservoir Uncertainties
Reservoir is the main source of uncertainties.

Seismic is a way to illuminate the underneath structure. You use the sound,
which propagates and receiving the waves back when they met a certain
surface.

Reservoir volume is about:

- Top and extension (seismic errors)

- Faults (transmissibility)
- Petrophysics (porosity, permeability, fracture distribution)
- Fluids contacts

When you drill, you are certain about the top of the reservoir.

Drilling wells is a cost and you delay also the field development. Find the
optimum number of exploration wells is not so obvious.

Case Study

It is about re-development.

Attic oil
Is the amount of oil that can be produced with that structure of wells.

Some studies can suggest you to drill to get the attic oil. But if a previous
company has abandoned the area, they are not stupid… for talking simply.

Undesidered fluids

About the trend of production, we have a family of curves depending on the

parameters:

- Porosity
- Thickness of the reservoir
- Permeability
- Type of development

Always, the reality never respects the expectations.

Theoretically you need infinite wells to perfectly know the structure.

Water breakthrough

The nightmare of the producers is the water breakthrough. Water has a density
higher than gas and higher than oil. The hydrostatic pressure goes down and
the production too.
Reserves in BOE and max production rate are roughly in a linear correlation.

Column of hydrocarbon 150 m

2-3 TSF of gas (Trillion cubic feet).

50% Joint Venture of ENI

From the data we data we are asked to roughly estimate the possible strategic
field development.

- CAPEX
- Peak Production
- Reserves

Deterministic calculations

We have the accumulation. Since the reserve thickness is 150 m, I can stay far
away from the water, so high recovery factor. Never seen in a gas field a
recovery factor higher than 85%.

Recovery factor is the ratio between the reserves and the accumulation.

What about the CAPEX? We start from the Unit Capex for the area 15$/BOE.

We use the formula for roughly estimate the peak production.

Proven: I proven with the wells 90%

Probable: near to proven 50%

Possible: estimation 30%

Development architecture
Schematically, when you develop a field you have three blocks:
 - Reservoir-wells
- Surface facilities
- Export systems

The export is very important in development. Where’s your client?

The choice of the optimum development scheme for avg size field takes
normally 1-3 years.

In the production process you process the fluid. In the well head ptf you just
transport the fluids.

Well heat ptf has as objective just the easier accesso to the well, for
maintenance for example.

Then you can have the combination of the two. Many fields offshore are
composed by wellhead platforms and production platforms, physically
connected by bridges.

If you have a giant field, you can have also a living quarter.

How do I evacuate the hydrocarbons? Where do they go? Existing network of

gas?

If you are far away from the coast, is better to have a floating storage unit to
store the process oil ready for the client.

Don’t’ make confusion between flaring and existing of the pilot flare in a plate.
All the oil plants have a flare, for depressurize

There are situations in which you have to close the well and depressurize the
lines. In a few seconds you have a lot of oil and gas that go from a high
pressure to low pressure.

Some thousand cubic meters per day.

FPSO – is rented or bought? Sometimes is convenient to rent, other times you

build brand new. It depends

Gas can’t be stored, except the case for liquefaction.

1 TSF how many barrel of oil equivalent?
2 3
10 f t
3
ft
35 3
m
1 TSF= 3
=178 MBOE
Sm
164
BOE
Living Quarters is often at the opposite from the flaring.

Big problem of FPSO development: you need a floating drilling rig for
intervention, which costs. 0.4 – 1 million dollar per day. No interventions
possible without it.

With fixed platform is much easier and less costly.

How to communicate with the wells? Open/close valves, data of temperatures,

pressure, etc. It is through umbilical

We have both electrical and hydraulic transmissions.

Is safer to maintain pressure, if something fails this pressure is lost and the loss
of pressure activate a valve. The viceversa, would bring a lot of problems!

From an environmental point of view, you have no visible structure.

Change of thermodynamic status of hydrocarbons.

There could be the solidification of some of the hydrocarbons. When you

produce gas and oil, we must be careful about precipitation of sodium chloride,
calcium chloride, calcium carbonate; organic like paraffins and asphalt, etc. Is
possible to dissolve them with additives , but is better to prevent.

The best advantage of having a well head is the possibility to intervein.

Why should the existing platform accept to negotiate for adding our reserve?
Maybe I have spare capacity, because I’m in the phase of decline of the
platform.
Multiphase pump: is able to pump gas and oil both. Liquid pumps doesn’t like
the gas, cavitation and vibrations problems.

Maximum gas accepted is 5-8%.

Although the technology was

Economic of the field must be analysed optimistic and deterministic

ways. Minimum two stochastic variables, 2-4.

Hot piping: you do operations without interrupting production.

Technology to be used
If the technology is new you introduce risks. Sometimes your development is
guarantee only is you use new technology, for example in Kazhakstan.