Petroleum Economics

Assignment on

Petroleum Economics

PES-203-PROSPECT EVALUATION &  PETROLEUM ECONOMICS

U N I T E D

N A T IO N S

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C O M M IS S IO N

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G U ID E L IN E S f o r  p r a c t ic a l a p p lic a t io n o f  U N I T E D N A T IO N S I N T E R N A T IO N A L F R A M E W O R K C L A S S I F IC A T IO N F O R R E S E R V E S /R E S O U R C E S - S o lid F u e ls a n d M in e r a l C o m m o d i t ie s P U ic n o m  E c o E  A x i s

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B L I C A T IO N E N G L IS H F R A N Ç A IS Р У С С К И Й

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CONTENTS

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INTRODUCTION TO PETROLEUM ECONOMICS

•

METHODS OF RESOURCE PROGNOSTICATION

•

RESERVE RESERVE CATEGORIZA CATEGORIZATION TION , ESTIMATI ESTIMATION,A ON,AND ND ECONOMIC ECONOMIC FORCASTING

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TECHNOECONOMIC STUDIES: SIMULATION TECHNIQUES

•

DISCUSSION AND CONCLUSION

INTRODUCTION

The probability of well finding petroleum is only one aspect of successful exploration, since the objective of exploration and exploitation is to make money, whic which h will will add add to the the econ econom omic ic enha enhanc ncem emen entt of coun countr try y invo involv lved ed and and to development. This exploration activity, starting from exploration to final exploitation involves several risks. To achieve the final goal, the risk involved and potential  profitability must be established, both for individual prospect and for a string of a wells. According to the “gamblers’ ruin” law, there is chance of going broke because of a run bad luck, irrespective of long term probability of success. Whether a gambler  (comp (compan any) y) is ruin ruined ed befo before re bein being g comm commer erci ciall ally y succe success ssfu full depe depend ndss both both on  probability of geological success and four commercial parameters

Potential profitability of venture 1. Avail Availab able le risk risk inv inves estm tmen entt fund fundss 2. Tota Totall ris risk k inv inves estm tmen entt 3.

Avers ersion to to ri risk 

Greenwalt (1982) has shown that some of these parameters may be quantified:

1-S= (1-Ps) N

Where;

S= aversion of risk  Ps= probability of geological success  N= number of ventures necessary to avoid companies ruin

Furthe Further, r, and much much more more elabor elaborate, ate, aids aids to explor explorati ation on decisi decision on making making involve more sophisticated quantification of these commercial parameters. Computer  simulation technique may then be used to aid the decision of weather or not to embark  on an exploration venture, and, if so, to determine the amount of risk the investors’ finances finances can tolerate. Such economic economic considerati considerations ons lie beyond beyond the field of geology, although they are extremely important aspect of petroleum exploration.

The exploration and production of petroleum involves various commercial as well as non commercial aspects than need to be balanced economically to be successful. It is being well defined that: "The integration integration of economic theory with business business practice practice for the purpose of facilitating decision-making and forward planning by by management.” is the key to success. To serve these objectives “Managerial Economics” is the discipline, which deals with the application of economic theory to business management. Managerial Economics thus lies on the borderline between economics and business management and serves as a bridge between the two disciplines. (See Chart 1) Economics, Business Management and Managerial Economics

Economics – Theory and Methodology

Business Management - Decision roblems Managerial Economics -- Application of  economics to solvin

Optimal Solutions to  business problems

Chart 1

Characteristics Characteristics of managerial economics

It would be useful to point out certain chief characteristics of Managerial Economics, Economics, inasmuch inasmuch as they throw further light on the nature of the subject-matt subject-matter  er  and help in a clearer understanding thereof. First   , Managerial Economics is micro-economic in character. This is because

the unit of study is a firm; it is the problems of a business firm, which are studied in it. Managerial Economics does not deal with the entire economy as a unit of study.  Secondly, Managerial Economics largely uses that body of economic concepts

and principles which is known as ‘Theory of the Firm' or 'Economics of the Firm'. In additi addition, on, it also also seeks seeks to apply apply Profit Profit Theory Theory,, which which forms forms part part of Distrib Distributi ution on Theories in Economics.

Thirdly, Managerial Economics is pragmatic. It avoids difficult abstract issues

of economic theory but involves complications ignored in economic theory to face the overall situation in which decisions are made. Economic theory appropriately ignores the variety of backgrounds and training found in individual firms but Managerial Economics considers the particular environment of decision-making. Fourthly, Managerial Economics belongs to normative economics rather than

 positive economics (also sometimes known as descriptive economics). In other words, it is prescriptive rather than descriptive. The main body of economic theory confines itself to descriptive hypothesis, attempting to generalize about the relations among different variables without judgment about what is desirable or undesirable. For  instance, the law of demand states that as price increases, demand goes down or viceversa but this statement does not tell whether the outcome is good or bad. Managerial Economics, however, is concerned with what decisions ought to be made and hence involves value judgments. This has two aspects: first, it tells what aims and objectives a firm should pursue; and secondly, these having been defined, it tells how best to achieve these aims in particular situations. Managerial Economics, therefore, has also  been described as 'normative micro-economics of the firm’. Fifthly, macroeconomics is also useful to Managerial Economics since it

 provides an intelligent understanding of the environment in which the business must operate. This understanding enables a business executive to adjust in the best possible manner with external forces over which he has no control but which play a crucial role in the well being of his concern. The important topics are: business cycles, national income accounting, and economic policies of the government like those relating to taxation, foreign trade, anti-monopoly measures, labour relations, etc. In fact, to conduct business without a solid grasp of such essential economic facts of life as gross domestic product, rates of exchange, balance of trade, inflation and unemployment would be like trying to sail without proper navigational tools. Managers and entrepreneurs, as such, now-a-days make it their business to have a good working knowledge of macro-economics.

SCOPE OF MANAGERIAL ECONOMICS As regards the scope of Managerial Economics, various authors have followed no uniform pattern. However, the following aspects (topics) may  be said to generally fall under Managerial Economics: 1. Demand Analyses and Forecasting, 2. Cost Analysis. 3. Productions and Supply Analysis, 4. Pricing Decisions, Policies and Practices, 5. Profit Management, and 6. Capital Management. These aspects may also be called as the 'subject-matter of Managerial Economies'. DEMAND ANALYSIS AND FORECASTSING Law of Demand

"Higher the price, lowers the demand, and vice versa, other things remaining the same". Chief Characteristics

The chief characteristics of the Law of Demand are as follows: 1. Inverse Relationship. The relationship between price and quantity demanded is

inverse. That is, if the price rises demand falls, and if the price falls, the demand goes up. 2.   Price, an independent variable, and demand, a dependent, variable. Under the

Law of Demand, it is the effect of price on demand, which is examined, and not the effect of demand on price. When demand rises, the prices would rise, and when demand falls, the price would fall. But the law of demand does not concern with this Kind of behavior or phenomenon. In other words, in the Law of Demand price is

regarded as an independent variable and demand a dependent variable, mathematical economists would call it. 3. Other things remain the same. The Law of Demand assumes that other things

remain the same. In other words, there should be no change in the other factors influencing demand except price. If, however, any one or more of the other factors, say, income, substitute's price, consumers' tastes and preferences. Advertising outlays, etc., vary, the demand may rise, in spite of a rise in price, or alternatively, the demand may fall in spite of a fall in price.4. Reasons underlying the Law of Demand. The inverse relation between price and demand as stated by the Law of Demand can be explained in terms of two reasons, viz., (a) Income Effect, and (b) Substitution Effect. a) Income Effect  The fall in the price of a commodity leads to and, therefore, is

equivalent to an increase in the income of the consumer because now he has to spend less for purchasing the same quantity as before. A part of the money so gained can be used for purchasing some more units of the commodity. When price rises, the consumer's income is, in effect, reduced and he has to curtail his expenditure on all commodities including the commodity whose price has risen. b) Substitution Effect. When the price of the commodity falls, the consumer tends to

substitute that commodity for other commodities, which have not become relatively dear. If the price of urad falls, some people in place of other pulses to some extent will use it. Conversely, when the price of a commodity rises, other commodities will   be used in its place, at least to some extent. Therefore, a fall in the price of a commodity increases demand and a rise in its price reduces demand.

COST ANALYSIS:Cost data for business decisions

For managerial control, costs must be classified according to areas of  executive responsibility and according, to the decree of authority over expenses delegated to the executive. Once one of the alternative plans is chosen, and

responsibility for carrying it out in an acceptable manner is assigned, expenses must  be reclassified in a manner that will measure how the performance of each executive compares with some standard budget.

Actual Cost and Opportunity Cost

Actual costs mean the actual expenditure incurred for acquiring or producing a good or service. These costs are the costs that are generally recorded in the books of  account, for example, actual wages paid, cost of materials purchased, interest paid etc. These costs are also commonly known as Absolute Costs or Outlay Costs. Incremental costs (Differential Costs) and Sunk Costs

 Incremental cost is the additional cost due to a change in the level or nature of   business activity. The change may take several forms, e.g., addition of a new product line, changing the channel of distribution, adding a new machine, replacing a machine   by a better machine, expansion into additional markets, etc. Thus, the question of  incremental or differential cost would not arise when a business is to be set up afresh. It arises only when a change is contemplated in the existing business. Past Costs and Future Costs

Past costs are actual costs incurred in the past and are generally contained in the financial accounts. The measurement of past costs is essentially a record-keeping activity and an essentially passive function insofar as the management is concerned. Fixed and Variable Costs

Total costs could be divided into two components: fixed costs and variable costs. Fixed costs remain constant in total regardless of changes in volume up to a certain level of output. They are not affected by changes in the volume of production. They will have to be incurred even when output is nil. There is an inverse relationship  between volume and fixed costs per unit. Thus total fixed costs do not change with a change in volume but vary per unit of volume inversely with volume. If the total  production increases, fixed costs per unit will go down and vice versa. Joint Costs

For product costing, it is desirable to distinguish between two broad categories of common products: joint products and alternative products. When an increase in the  production of one product causes an increase in the output of another product, then the products and their costs are traditionally defined as joint. For example, when gas is produced from coal, coke and other products also emerge. The later will have as  joint cost the purchase price of coal. Hence the processing of material automatically results in two or more distinct products being produced. In contrast, when an increase in the output of a product is companied by a reduction in other products, the products may be called alternative. Slag and Steel are joint products, but steel rails and steel  bars are alternative products. When the proportion of the various products is fixed, separate products costs are indeterminate and there is no point in contemplating their  separation. Shutdown and Abandonment Costs

Shutdown costs may be defined as those costs which would be incurred in the event suspension of the plant operation and which would be saved if the operations were continued.

Examples of such costs are the costs of sheltering the plant and

equipment and construction of sheds for storing exposed property. Further, additional expenses may have to be incurred when operations are restarted, e.g., re-employment of workers may involve cost of recruitment and training. Abandonment costs are the costs of retiring altogether a plant from service, abandonment arises when there is a complete cessation of activities and creates a   problem as to the disposal of assets; for example, the costs involved in the discontinuance of tram services in Mumbai and Delhi. These costs become important when management is faced with the alternatives of either continuing the existing plant or suspending its operations or abandoning it altogether.

Urgent and postponable Costs

Those costs which must be incurred in order to continue operations of the firm re urgent costs; for example, the costs of materials and labour which must be incurred if production is to take place. Costs, which can be postponed at least for some time, are known as  postponable costs, e.g., maintenance relating to building and machinery. Out-of-Pocket and Book Costs

Out-of-pocket costs refer to costs that involve current cash payments to outsiders. On the other hand, book costs such as depreciation do not require current cash payments. Book costs can be converted into out-of-pocket costs by selling the assets and having them on hire. Rent would then replace depreciation and interest. Escapable and Unavoidable Costs

Escapable costs refer to costs, which can be reduced due to a contraction in the activities of a business enterprise. Replacement and Historical Costs

Historical cost means the cost of a plant at a price originally paid for it. Replacement cost means the price that would have to be paid currently for acquiring the same plant. Controllable and Non-controllable Costs

A controllable cost may be defined as one, which is reasonably subject to regulation, by the executive with whose responsibility that cost is being identified. Thus a cost, which is uncontrollable at one level of responsibility, may be regarded as controllable at some other, usually higher level.

Average Cost, Marginal Cost and Total Cost

Average cost is the total cost divided by the total quantity produced. Marginal cost is the extra cost of producing one additional unit. Cost-Output Relationship

The study of cost-output relationship has two aspects: 1. Cost-output relationship in the short run, and 2. Cost-output relationship in the long run. The short run is a period, which does not permit alterations in the fixed equipment (machinery, buildings, etc.) and in the size of the organization. As such, if  any increase in output is desired, it is possible within the range permitted by the existing fixed factors of production. The long run is a period in which there is sufficient time to alter the equipment (machinery, buildings, land, etc.) and the size of organization. As such, in the long run output can be increased without any limits being placed by the fixed factors of   production, as they themselves are capable of being changed. Production Function and Supply Analysis

The Production Function can be illustrated as in Chart-1. Inputs (the ellipse on the left are transformed into outputs (the ellipse on the right) via a set of production  processes that constitutes the production function (the rectangle between). Thus, steel  plate and a host of other inputs are combined with labour in various combinations to   produce motorcars; schoolrooms, books, teachers and students are combined to  produce an elusive output called education. Sometimes an output of one productive   process is an input to another (for example, a tyre): such goods are known as intermediate Outputs.

Production Function Inputs

Outputs

The production function can also be expressed in the form of a schedule. Table 1 shows two inputs: labour (X), that is, number of men, capital (Y), that is, size of  machine (in terms of horsepower), and the output (Q), that is, the number of tonnes of  iron ore produced with the various combinations of inputs. Table 1: Production Function

Capitol (Y) — Size of machines (in horse power) 250 1,000 1,500 2,000 Labour (X) (Number of workers)

1 2

2 4

20 48

32 58

26 88

3 4 5 6 7 8 9 10

8 12 32 58 88 100 110 104

88 110 120 124 120 126 126 124

110 120 124 126 128 130 130 130

100 110 120 124 128 130 132 134

The production function can be stated in the general form of an equation:

Y=f (X  ,X  l  2 , etc.)

Where Y, the units of output, is a function of the quantity of two or more inputs with X1 including units of labour, for example, and X 2 units of machinery. Some factor of   production maybe assumed as fixed (i.e., not varying with changes in output); such factors will not enter the equation. The production function can be estimated by the method of least squares. In economic theory, we are concerned with three types of production functions, viz., 1. Production function with one variable input, 2. Production function with two variable inputs, and 3. Production functions with all variable inputs.

Hence. “Managerial Economics as "the integration of economic theory with  business practice for the purpose of facilitating decision-making and forward planning   by management.” is the discipline, which deals with the application of economic theory to business management. Managerial Economics thus lies on the borderline  between economics and business management and serves as a bridge between the two disciplines. METHODS OF RESOURCE PROGNOSTICATION

After completion of various surveys analytical studies of the proposed areas are done this is defined as Prognostication. It is followed by assessment of the stratigraphy and other geological data. Reliability of prognostication depends on the quantity and quality of data and the expertise of the geologist to interpret them. In order to make a correct estimate, it is desirable to have an idea about the processes of  origin, sedimentation and laws, which control the distribution of oil and gas accumulation in a particular basin.

The following characteristics should always be borne in mind to distinguish a hydrocarbon-bearing basin.

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Direct and indirect evidences of presence of oil and gas.

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Favorable tectonics and structure, presence of oil, basement high, etc. suitable structural/stratigraphic traps.

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Metamorphism should be within the reasonable limits so that the generated oil/gas may not be destroyed.

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Availability of favorable facies and lithological conditions.

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Existence of suitable hydrogeological conditions.

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Caprock for entrapment.

Surface indication of hydrocarbon is not at all a guarantee that oil/gas will be  present at depth. It is only the drilling of the well that can tell of the presences or absences of hydrocarbon or its commercial viability.

RESERVE PROGNOSTICATION METHODS

Quantitative.

Qualitative

Qualitative estimation is done first to define areas of different prospectivenes.

With availability of more and definite data. Quantitative estimation is volumetric analysis of reserve and involves mathematical

methods. On the basis of qualitative prognostication, the basin or part of basin is divided into size qualitative zones, as follows:

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High prospective area with proved commercial oil/gas bearing structures.

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High prospective area with non-proved, likely commercial oil/gas bearing structures.

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Prospective area

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Areas with low prospects

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Areas with some prospects which have yet to be proved

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Nonprospective areas.

RESERVE CATEGORIZATION, ESTIMATION,AND ECONOMIC FORECASTING:-

Classifications are dynamic and not static. We therefore need to begin the analysis by reviewing the historical evolution and end by contemplating the possible future changes. But we always live between the past and the future. Therefore we need to consider carefully the strength of the new and dominating classification  presented in 2000 by the Society of Petroleum Engineers (SPE; http://www.spe.org), the World Petroleum Congresses (WPC) and the American Association of Petroleum Geologists (AAPG). This has now been adapted for application in Norway. A comparison with the Russian classification is used to illustrate how two systems may   be unified to complement each. Before coming to that point, we will examine the various needs for classification in Government, industry and finance. The

internationalisation of finance over the last decades is making it so obvious these days that a corresponding infrastructure of international financial regulations is required. Future changes may well come with initiatives in this area.

“Reserves and resource classifications change slowly to reflect needs” •

How has the historical evolution been? 

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What are the current SPE/WPC/AAPG and Norwegian NPD/FUN  classifications? 

•

What potential improvements does the facilitate? 

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new classification

Examine the classification used when quoting reserves in financial statements.

•History

Examine aclassification scheme for unifying different classifications: The case of NPD’s of the Russian and the NPD/FUN classification.

•

1965 - 1991

•

 –  –

NEAR SURFACE PROFILE  –

Simple tables to more advanced spreadsheets

Conclusions: What changes can we expect to see in the future?  6 resource classes

Only reserves used (even for undiscovered prospects), later (1984) distinguished between Reserves and Resources, Discovered and  Undiscovered. Defines Maturity of petroleum resources

Few fields, easy overview/control  Petroleum reserves and resources classifications are used for different purposes: 1991-1994 Introduces probabilistic data of resources •  –

6 resource classes, including improved recovery  q Government: Register Minimum (P95), Expected and Maximum (P05)  –  –

•

 1994-1997

Manage the country’s petroleum resources Further development…..

7 resource classes, including fields that are closed down and discoveries q Industry  that are relinquished.  –

 –

•

The maturity of the resources with respect to production are focused  Manage exploration and production processes 

2001 New classification system based on SPE/WPC/AAPG. q Financial management 

Petroleum resources are classified to meet the needs of analyses. The needs fall in three broad classes:

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Petroleum resource management – primarily at government levels.

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Management of the business processes for exploration and production –   primarily at corporate levels.

•

Investment management – primarily at the level of owners and lenders (financiers).

If we are to find one classification which serves the needs of all three classes of  analysis we must understand the way information is used in the different analyses.

A common, and main, goal of government in performing its petroleum resource management functions is to open acreage for exploration and production, and to regulate the activities in such a way as to maximize economic recovery of the country’s petroleum resource base in the long run. This requires a realistic view of the entire petroleum resource base, of the total activities over time, and of the efficiency with which petroleum is recovered and produced for sale. Companies are assigned exclusive exploration and production rights to achieve the wanted results in practice. Companies need to manage their business processes accordingly. This is primarily done through the exploration and production decisions that are taken and executed. Corporations therefore often use a structured pattern of  decisions, and classify their petroleum resources accordingly. Capital to conduct the activities is managed by owners of corporations and by  banks and other lending institutions. The financiers are concerned that the information with regard to petroleum resources be related to the value and that this relationship  between resources and value be the same for the different corporations that they may choose to finance. Analyses that investors make of stocks and securities require clarity about the high value resources (proved and proved developed reserves). They tend therefore to de-emphasize, or exclude, low value resources and resources which cannot easily be quantified, such as exploration and production potentials. As the needs within these three applications of petroleum classification are distinctly different, different classifications have been developed for the three   purposes. In addition, countries, companies and security and exchange authorities

have developed their variations of the needed classifications and definitions independently

SPE/WPC/AAPG reserves definitions and resource classification

   E    C    A    L    P     N    I     Y    L    L    A    I    T    I    N    I     M    U    E    L    O    R    T    E    P    L    A    T    O    T

    N    I     L    Y    A    L    I    L    C    A    R    I    T    E    I    M    N    I    M     M    O    U    C    E    L    O    R    T    L    E    A    P    I    D    C    E    R    R    E    E    M    V    M    O    O    C    C     S    I    E    B    D    C    U    A    S    L    P     N    I     Y    D   L    E   L    R   A    I    E   T    V   I    N    O   I     C   M    S    I    U    D   E    N   L    U   O    R    T    E    P

PRO DUC TION

RESERVES

PROVED

PROVED plus PROBABLE

PROVED plus PROBABLE plus POSSIBLE

CO NTING ENT R E S O U R C E S LOW ESTIMATE

BEST ESTIMATE

HIGH ESTIMATE

UNRECOVERABLE

PR O SPECTIVE R E S O U R C E S LOW ESTIMATE

BEST ESTIMATE

HIGH ESTIMATE

UNRECOVERABLE

RAN GEOFUNCER TAINTY

Not toscale

Fig.1

The World Petroleum Congresses (WPC) and the Society of Petroleum Engineers (SPE) published joint reserves definitions in 1997. A Petroleum Resource Classification issued jointly by SPE, WPC and AAPG in 2000 followed this.

Most importantly, the reserve definitions have firmly established probabilistic methods as an accepted industry standard.

The Norwegian Petroleum Directorate/Forum for Forecasting and Uncertainty Evaluation (NPD/FUN) classification

RESOURCE CLASS Sold and delivered petroleum

   E    C    A    L    P      N    I      Y    L    L    A    I    T    I    N    I      M    U    E    L    O    R    T    E    P    L    A    T    O    T

   E    C    A    L    P      N    I      Y    L    L    A    I    T    I    N    I      M    U    E    L    O    R    T    E    P    D    E    R    E    V    O    C    S    I    D

   L    A    I    C    R    E    M    M    O    C

   L    A    I    C    R    E    M    M    O    C      B    U    S

PROJECT STATUS CATEGORY C0

C1

RESERVES

CONTINGENT RESOURCES

Sold and delivered

In Production

C2A/F

Approved Development Plan

C3A/F

Decided recovery

C4A/F

In planning

C5A/F

Unclarified

C6

Not very likely

C7A/F

Not evaluated

   K    S    I    R    R    E    W    O    L

   Y    T    I    R    U    T    A    M    T    C    E    J    O    R    P

UNRECOVERABLE

   E    C    A    L    P      I    D   N      E   Y    R   L    E   L    A    V   I    O    T    C   I    N    S      I   I    D   M    N   U    U   E    L    O    R    T    E    P

PROSPECTIVE RESOURCES

C8

C9

Prospect

Lead

   K    S    I    R    R    E    H    G    I    H

UNRECOVERABLE

RANGE OF UNCERTAINTY

Fig. 2

The classification has two characteristics that combine to give it a powerful  potential.

•

It facilitates the use of probabilistic estimates

•

The project status categories relate to recovery efforts, and not only to  petroleum accumulations.

This facilitates consistency between financial reporting and the reporting of  reserves and resources. It also facilitates valuing opportunities and risks, hidden by uncertainty. To illustrate, consider the value of flexibility in developing a field:

Unifying the Russian and International Classifications

SPE/WPC/AAPG

NPD/FUN

Russian classification Reserves

Resource class

Project status category 0

Sold and delivered petroleum   e    l   a   c    i   a   c    l   p   r   e   n   m    i   y   m    l    l   o   a    i    t    C    i   e   n   c    i   a    l    l   p   m   u    i   a   n    l   e   c    i   o   y   r   r    l    l    t   e   a   e   m    i    t   p    i   n    d   m   o    i   e    C     m   r   e    b   u   v   e   o   u    l   o   c    S   r   s    t    i   e    D   p    l   a    t   o    T

Reserves

Contingent resources

Sold and delivered

Resources

Stages of  Non C3 D/1 D1 D2 Commercial A B C1 C2 commercial Development

Produced

On Under  1 On production production development Under  Approved 2A/F development devlopment plan Prepared for  development Planned for  3A/F Decided recovery development Developmen 4A/F In Planning pending Being explored Developmen 5A/F U nclarified on hold Developmen 6 Not very likely Conserved not viable 7 A/F N ot ev al ua te d

Unrecoverbale

  y    l    l   a    i   e    t   r   i   e   i   n   e   c   v   a   o   m    l   c   u   s   e   n    l    i   n   o   r    t   e   p

Prospective resources

Prospect Lead Play

8

Prospect

9

Lead

Undiscovered fields

Unrecoverable

Fig. 3

The problem of managing a change in classification is quite different of  course. The first step is to construct a matrix showing the two classifications on  perpendicular axes. Figure.3 shows the Russian classification against the NPD/FUN classification.

The similarities and differences in the two classifications become quite apparent. The matrix is in itself an improvement over both classifications, particularly

when working across the systems. To illustrate, when reporting reserves in the project status category “on production” according to the NPD/FUN classification, it will be necessary to assign attributes showing whether it is an A, B or C1 category in the Russian classification. Likewise, the category C1 in the Russian classification will need attributes showing whether it has project status category 1, 2A or F, 3A or F, 4A or F, 5A or F or 6 in the NPD/FUN classification.

The result is a richer classification, but also one that is more complex to communicate and practice. Some of the complexity could be redundancies that might  be eliminated at the introduction of the matrix. Others may be streamlined through evolutionary changes that come with practice. The conversion matrix meets the concern that an existing and operative system is not abandoned before a new one is in  place.

The United Nations Economic Commission for Europe has a special mandate to look after energy issues in the UN system. Their committee on sustainable energy has taken an initiative that may facilitate transitions to new systems of  classification, by forming an ad-hoc group on the harmonization of terminology for  energy reserves resources. The group is proposed to be composed of experts from  petroleum, coal and uranium communities and institutions including OPEC, WPC, The World Energy Council, The Nuclear Energy Agency, The International Atomic Energy Agency, Council of Mining and Metallurgical Institutions, The Society of  Petroleum Engineers among others. A staring point for discussions is the UN •

Framework Classification that defines resources by their geological description,

Probabilistic forecasting better reflects our understanding and 

technical maturity and economic viability.

therefore facilitates better management.

•

Needs for r esource management/business management and  financial management are likely to require different classifications also in the future.

Conclusioand possible future developments •

Differences may be reduced by:  –

Reporting mean values of reserves as a basis for change explanations.

 –

Reporting proved reserves as a supplement.

 –

Using forward prices for forecasts instead of historical prices.

•

The internationalisation of finance requires international standards.

•

Classifications must evolve in a continuous way and not change abruptly. Conversion matrices may facilitate transitions.

ESTIMATION OF RESERVES

•

Volumetric method

•

Decline curve method

•

Material Balance method

•

Mathematical simulation

VOLUMETRIC METHOD

Oil Reservoirs

The volumetric method for estimating recoverable reserves consists of  determining the original oil in place (OOIP) and then multiplying it by an estimated the ‘Recovery Factor’ (Er ). OOIP is arrived at by a simple formula involving the bulk  volume of the reservoir (A × h), the porosity ( φ ), the initial oil saturation (S wi) and the oil formation volume factor’ (β o). The bulk volume is determined from the isopach map of the reservoir. The porosity and oil saturation are determined through the analysis of reservoir core samples and electrologs of the hydrocarbon bearing horizon. The β

o

is determined either in the laboratory through the PVT analysis of reservoir 

fluid samples or from the standard correlations which take into accounts the reservoir   pressure, temperature, oil API gravity etc. Thus, OOIP. N = Ah

Soi/

oi

The units in the formula have all to be either in standard American units or  metric units. In the standard American units, the bulk volume (A.h) is expressed in acre-feet and β

o

in reservoir barrels / stock tank barrel (RB/STB). In this case, the

volume term acre – feet is to be converted into barrels. In the metric system, the bulk  volume is expressed in m 3 and β

oi

in m3/m3. φ and Swi are fractions in both the

systems. N is expressed is S.T.Bs. or m 3 in both the systems. Original-solution gas-in-place, OSGIP, is given by: Gs = N.R si

Where Gs = OSGIP, scf    N = OOIP, STB R si, = the initial solution gas-oil ratio (GOR) in scf/STBO. The original-free gas-in-place in the gas cap, if present in the reservoir is given  by: G = 7758 Ah

Sgi/

gi

Where G = original free gas in place, scf  Sgi=initial gas saturation, fraction

β gi= initial gas formation volume factor, RB/scf  h=average thickness, ft (gas interval)

API Correlations

AP1 Correlations for the E r  term exist for different types of drive mechanisms and lithologies of the formations and petrophysical and fluid saturation parameters. API correlation for recovery efficiency for solution gas drive reservoirs (sand, sandstones, and carbonate rocks) is given by

ER =41.815 [

(1- Swi)/Bob]^0.1741-0.1611 * (k/μob) ^0.0979 *(S wi) ^0.3722 * (pb/pa)^0.1741

Where ER  = recovery efficiency, % OOIP at bubble point

φ = porosity, fraction of bulk volume Swi = interstitial water saturation, fraction of pore space Bob = oil formation volume factor at bubble point, RB/STB k = absolute permeability, Darcy μob = viscosity of oil at bubble point, cp  p b = bubble point pressure, psia  pa = abandonment pressure, psia

Recovery efficiency for water drives reservoirs (sands and sandstones): ER =54.898 [

(1- Swi)/ Boi] ^0.0422 * (k μ wi /μoi) ^0.0770 *(S wi) ^-0.1903 * (p i/pa) ^0.2159

Where ER = recovery efficiency, % OOIP Boi = initial oil formation volume factor, RB/STB μwi = initial water viscosity, cp μoi = initial oil viscosity, cp  pi = initial reservoir pressure, psia

DECLINE – CURVE METHOD

Decline curve method is based on the well recognized concept that the producing rate is bound to decline with time in a depleting system.

Since the graphical

representation of production data eventually shows production curves decrease with time, the curves are known as “decline curves”.

When sufficient production data are available and production is declining, the  past production curves of individual wells, lease, or field can be extended to indicate future performance. The very important assumption in using decline curves is that all factors that influenced the curves in the past remain effective throughout the   producing life.

Many factors influence production rates and consequently

decline curves. These are proration, changes in production methods, workovers, well treatments, pipelines disruptions, and weather and market conditions. Therefore, care must be taken in extrapolating the production curves in the future. When the shape of  a decline curves changes, the cause should be determined, and its effect upon the reserves evaluated. When sufficient production data are available and the production is declining with time, the past such information of an individual well or the field as a whole can  be extrapolated to indicate future performance, upto the level of acceptable economic rate. The commonly used types of decline curves for oil reservoirs are

1.

Log of production rate Vs time

2.

Production rate Vs cumulative production.

3.

Log of water-cut or oil-cut Vs cumulative production.

4.

Change in the OWC or GOC Vs cumulative production.

5.

Log of cumulative gas production Vs cumulative oil production.

A very important assumption in using the decline curves is that all factors that influenced the curve in the past remain effective throughout the life of the field, which is practically not true. Therefore care must be taken in extrapolating the curves for  future performance. When there is a change in the shape of the curve, the cause must  be looked into and its effect on the reserves evaluated. The type 1 & 2 plots are straight lines indicating a ‘constant decline rate’ or  ‘exponential decline curves’. These are most commonly used. In case of ‘harmonic’ or ‘hyperbolic’ decline rate, the curves exhibit curvature.

Unrestricted early

 production from a well or field shows hyperbolic decline rate. However, exponential decline rate will be reached at a later stage of production.

Type 3 curves are

employed when economic production rate is dictated by the cost of water treatment and disposal. Type 4 curves are used for natural water or gas cap drive reservoirs.

Type 5 curves are used when the oil reserves are known and the gas reserves are to be estimated or vice versa.

The basic mathematical expression for the rate of decline, D, is expressed as, D = (dq/dt) q = Kq n Where, q = production rate, barrels per day, month or year

t = time, day, month or year  k = constant n = exponent The decline rate D, in the above equation can be constant or variable with time yielding three basic types of production decline, i.e., exponential, hyperbolic and harmonic. a. Exponential or Constant Decline D = (dq/dt) q = K= -ln (qi/qt)/t

When n=0, K= constant qi = initial production rate qt = production rate at time t The rate-time and rate-cumulative relationships are given by qt = qi * e-Dt Qt = qi - qt / D

Where: Qt = cumulative production at time t A familiar rate constant for exponential decline is as follows: D’ = Δq/ qi

Where Δq is the rate change in the first year. In this case, the relationship between D and D’ is given below: D= - ln (1- Δq/ qi) = - ln (1-D’)

b. Hyperbolic Decline

D = (dq/dt) q = Kqn (0 < n < 1)

This is the same equation as the general decline rate equation except for the constraint on n. For initial condition K = Di/ qin

The rate-time and rate-cumulative relationships are given by: qt = qi(1+n Dit)^-1/n Qt = qin(qi1-n – qt1-n)/(1-n) Di

Where Di = initial decline rate

c. Harmonic Decline

D = - (dq/dt) q = Kq

When n=1 For initial condition K = Di/ qi

The rate-time and rate-cumulative relationships are given by: qt = qi / (1+Dit) Qt = qi /Di ln qi /qt

Both exponential and harmonic declines are special cases of the hyperbolic decline. MATERIAL BALANCE METHOD

The material balance method is based on the fundamental principle of the law of  conservation of mass and is used to estimate the original hydrocarbon in place and the ultimate primary recovery. The basic assumption made in this technique are:

•

Homogeneous tank model

•

Fluid production and injection occur at single production and single injection  points.

•

There is no direction to the fluid flow.

• However, the reservoirs are not homogeneous; production and injection wells are areally distributed and are activated at different times and fluid flows in definite directions.

Inspite of these deviations from the basic assumptions, the material

 balance method is the most widely used, because of its reasonably acceptable results.

The material balance equations can be used to estimate the OOIP by history matching the past performance and to predict the future performance. The general material balance equations for oil reservoirs contain three unknowns : original oil in place, gas-cap size and cumulative natural water influx. The equations include production and injection data, rock and fluid properties that depend upon the reservoir pressureThe basis of general material balance equation is : Underground withdrawal = Expansion of oil

+ Original dissolved gas + Expansion of gas caps + Reduction in hydrocarbon pore volume due to connate water expansion and decrease in the pre volume. + Natural water influx. The material balance as an equation of straight line is given by: F = N (E o + mEg + Efw) + We Where F = underground withdrawal, RB  N = Original oil in place, STB Eo = Expansion of oil and original gas in solution, RB/STB Eg = Expansion of gas cap gas, RB/STB. m = Initial gas-cap volume fraction, RB/RB, (gas cap/oil zone) Efw = expansion of the connate water and reduction in the pore volume, RB/STB. We = cumulative natural water influx

MATHEMATICAL SIMULATION

 Numerical reservoir simulators play a very important role to study the reservoir performance and to decide upon the methods for enhancing the ultimate recovery of hydrocarbons from the reservoir. Numerical simulation is still based upon material balance principles, taking into account reservoir heterogeneity and direction of fluid flow. Unlike the classical material balance approach, a reservoir  simulator takes into account, the locations of the production and injection wells and their operating conditions. The wells can be turned on and off at desired times with

specified down-hole completion. The wells’ rates and / or the bottom hole pressures can be set as desired. The reservoir is divided into many tanks or cells to take into account for the heterogeneity. Computations using material balance and fluid flow equations are carried out for oil, gas and water phases for each cell at discrete time steps, starting with the initial time.Different types of simulators are devised for different types of  applications. Their broad features and their use for specific applications are briefly indicated below:

•

Black-oil models are most frequently used to simulate isothermal, simultaneous flow of oil, gas and water due to viscous, gravitational and capillary forces, Black  oil is a term used to signify that the hydrocarbon phase is considered as a single liquid and gas and not by chemical composition.

The phase composition is

constant even though the gas solubility, in oil and water is taken into account.

•

Compositional simulators account for variation of phase composition with  pressure in addition to flow of the phases. They are used for performance studies of volatile oil and gas condensate reservoirs.

•

Thermal simulators account for both fluid flow and heat transport and chemical reaction.

They are used to simulate steam flood and in-situ combustion

 performances.

•

Chemical simulators account for fluid flow and mass transport due to dispersion, absorption, partitioning and complex phase behavior observed in chemical EOR   process like surfactant / polymer/caustic flooding etc.

EFFECT OF OPERATING CONDITIONS

Operating conditions are subject to change caused by changes in economic conditions, unforeseen production problems, new production practices or methods, and the operator’s financial position. As with economic conditions, operating conditions to be expected at the time of abandonment are speculative. Thus, current operating conditions are used in estimating proved reserves. In considering the effect of operating conditions, a distinction must be made between processes and techniques

that would normally be applied by a prudent operator in producing his oil and gas, and initiation of changes in operating conditions that would require substantial new investment.

Compression  – Compression facilities are normally installed when the productive

capacity or deliverability of a natural gas reservoir or its individual wells declines. In other cases compression is used in producing shallow, low–pressure reservoirs or  reservoirs in which the pressure has declined to a level too low for the gas to flow into a higher pressure pipeline.

The application of compression increases the pressure and, when economical, is used to make production into the higher pressure pipeline possible. Compression facilities normally require a significant investment and result in a change in operating conditions. It increases the proved reserves of a reservoir, and reasonably accurate estimates of the increase can be made.

Well stimulation  – Procedures that increase productive capacity (workovers, such as

acidizing or fracturing, and other types of production practices) are routine field operations. The procedures accelerate the rate of production from the reservoir, or  extend its life, and they have only small effect on proved reserves. Reasonable estimates of their effectiveness can be made.

 Improved recovery techniques  – These techniques involve the injection of a fluid or 

fluids into a reservoir to augment natural reservoir energy. Because the response of a given reservoir to the application of an improved recovery technique cannot be accurately predicted, crude oil production that may ultimately result from the application of these techniques is classified as “indicated additional reserves of crude oil” rather than as proved reserves until response of the reservoir to the technique has  been demonstrated. In addition, improved recovery methods are not applicable to all crude oil reservoirs. Initiation of improved recovery techniques may require significant investment.

 Infill drilling  – Infill drilling (drilling of additional wells within a field/reservoir) may

result in a higher recovery factor, and, therefore, be economically justified.

Predictions of whether infill drilling will be justified under current economic conditions are generally based on the expected production behavior of the infill wells. VALIDATION OF RESERVES ESTIMATES

A practical method of validating and confirming that reserves estimates meet the definitions and guidelines is through periodic reserves reconciliation of both entity and aggregate estimates. The tests described below should be applied to the same entities or groups of entities over time, excluding revisions due to differing economic assumptions: Revisions to proved reserves estimates should generally be positive as new information becomes available. Revisions to proved + probable reserves estimates should generally be neutral as new information becomes available. Revisions to proved + probable + possible estimates should generally be negative as new information becomes available. These tests can be used to monitor whether procedures and practices employed are achieving results consistent with certainty criteria contained in Definitions of  Reserves. In the event that the above tests are not satisfied on a consistent basis, appropriate adjustments should be made to evaluation procedures and practices. MATERIAL BALANCE METHODS

Material balance methods of reserves estimation involve the analysis of   pressure behavior as reservoir fluids are withdrawn, and generally result in more reliable reserves estimates than volumetric estimates. Reserves may be based on material balance calculations when sufficient production and pressure data are available. Confident application of material balance methods requires knowledge of  rock and fluid properties, aquifer characteristics, and accurate average reservoir   pressures. In complex situations, such as those involving water influxes, multi-phase  behavior, multi-layered, or low permeability reservoirs, material balance estimates alone may provide erroneous results. Computer reservoir modeling can be considered a sophisticated form of material balance analysis. While modeling can be a reliable   predictor of reservoir behavior, the input rock properties, reservoir geometry, and fluid properties are critic al. Evaluators must be aware of the limitations of predictive models when using these results for reserves estimation. The portion of reserves

estimated as proved, probable, or possible should reflect the quantity and quality of  the available data and the confidence in the associated estimate. PRODUCTION DECLINE METHODS

Production decline analysis methods of reserves estimation involve the analysis of production behavior as reservoir fluids are withdrawn. Confident application of decline analysis methods requires a sufficient period of stable operating conditions after the wells in a reservoir have established drainage areas. In estimating reserves, evaluators must take into consideration factors affecting production decline  behavior, such as reservoir rock and fluid properties, transient versus stabilized flow, changes in operating conditions (both past and future), and depletion mechanism. Reserves may be assigned based on decline analysis when sufficient production data are available. The decline relationship used in projecting production should be supported by all available data.

MATHEMATICAL SIMULATION

 Numerical reservoir simulators play a very important role to study the reservoir performance and to decide upon the methods for enhancing the ultimate recovery of hydrocarbons from the reservoir. Numerical simulation is still based upon material balance principles, taking into account reservoir heterogeneity and direction of fluid flow. Unlike the classical material balance approach, a reservoir  simulator takes into account, the locations of the production and injection wells and their operating conditions. The wells can be turned on and off at desired times with specified down-hole completion. The wells’ rates and / or the bottom hole pressures can be set as desired. Reserve estimation techniques are as follows: 

Volumetric method- Applies to crude oil and natural gas reservoirs. Based on raw engineering and geologic data.



Material Balance- Applies to crude oil and natural gas reservoirs. Is used in estimating reserves. Usually of more value in predicting reserves, and reservoir performance.



Pressure Decline- Applies to non associated and associated gas reservoirs. The method is a special case of material balance equation in the absence of water influx.



Production Decline- Applies to crude oil and natural gas reservoirs during production decline.



Reservoir Simulation- Applies to crude oil and natural gas reservoirs. Is used in estimating reserves. Usually of more value in predicting reservoir performance. Accuracy increases when matched with past  pressure and production data.



 Nominal- Applied to crude oil and natural gas reservoirs. Based on rule of thumb or analogy with another reservoir or reservoirs believed to be similar; least accurate of methods used.

TECHNOECONOMIC STUDIES: SIMULATION TECHNIQUES

Integrated system analyses, techno economic analyses, and other analysis tools are essential to our research and development efforts. They provide an understanding of the economic, technical, and even global impacts of renewable technologies. These analyses also provide direction, focus, and support to the development and commercialization of oil industry. Many methods have been used in analysing the economic aspects of  investments. probably no one method is entirely suitable for the innumerable variations in investment situations. Element of risk is another factor which is an important aspect of investment selection . However the element of risk cannot be included with other economic aspects of the problem, dose not preclude a through analysis and discussion of the various element of risk involved in the particular   problem under study. Several methods of comparing investment possibilities have  been evolved which have particular merit in oil and gas operation Geo technical estimates:

Part of the determination of the resource assessment and scientific risk  components of a complete exploration risk analysis is predicted on the ability to  provide technical estimates on (!) Dimensional aspects of a potential hydrocarbon target, such as thickness, area, volume, depth, tilt, closure.

(2) Reservoir characteristics such as porosity, permeability, gas to oil ratio, hydrocarbon recovery efficiency. (3) Geochemical factors such as source rock richness and depth, maturity, total organic carbon (TOC) and kerogen types. (4)Migration factors of hydrocarbons to the potential reservoir, such as transmission effectiveness (migration loss), dispersal. (5) Trap integrity with time, such as leakage, recharge, flushing, tilting. (6) The relative and absolute timing of hydrocarbon migration versus structural and stratigraphic dynamic events both in the reservoir and in the migration routes. (7) Other factors such as biodegradation and percent inert gases. Geotechnical estimates also play a role in the engineering design phase  because estimates of depth to the potential reservoir, of the stratigraphic sequences   present, and of over pressure all indicate the likely drilling conditions to be encountered, while reservoir area estimates provide an idea of the acreage that needs to be developed, and reservoir characterization estimates are used to yield an indication of the completion conditions. Thus pre-project engineering design costs are also influence by the quantitative estimates of conditions anticipated to be encountered while drilling from the geological concept.

Enhanced Recovery Techniques

After a well has used up the reservoir's natural drives and gas lift or pumps have recovered all the hydrocarbons possible, statistics show that 25 to 95% of the original oil in the reservoir may still be there. This amount of oil can be worth recovering if prices are high enough. The major methods of improved oil recovery are water flooding, gas injection, chemical flooding, and thermal recovery. These techniques are used when production from the well starts to decrease.

Water flooding is a technique where water is injected into the formation using wells that have ceased production. The injected water enters the reservoir and displaces some of the remaining oil toward producing wells in the same reservoir. The  producing wells then pump up the oil and water. Several injection wells surround each  producing well. Water flooding is the least expensive and most widely used secondary recovery method.

Production can also be increased by injecting gas, such as natural gas or  nitrogen, into the reservoir. The injected gas expands to force additional volumes of  oil to the surface. Chemical flooding uses special chemicals in water to push oil out of the formation. These chemicals act as surfactants that cause the oil and water to mix and  break the oil into tiny droplets that can be more easily moved through the reservoir to the well. Thermal recovery is used when the oil is so viscous, or thick, that it cannot flow through the reservoir and into a well. When the oil is heated, its viscosity is decreased and the flow increases. Recovery techniques that use heat are called thermal processes or thermal recovery.

Steam Drive or steam injection involves generating steam on the surface and forcing this steam down injection wells and into the reservoir. When the steam enters the reservoir, it heats up the oil and reduces its viscosity. The heat from the steam also causes hydrocarbons to form gases, which also increases flow. The gases and steam provide additional gas drive and the hot water also moves the thinned oil to  production wells.

Another way to use heat in a reservoir is fire flooding, or in situ (in-place) combustion. In fire flooding, the crew ignites a fire in place in the reservoir. They inject compressed air down an injection well and into the reservoir. A special heater  in the well starts a fire.

As the fire burns, it begins moving

through the reservoir toward production wells. Heat from the fire thins out the oil around it,

Causes gas to vaporize from it, and changes water in the reservoir to steam. Steam, hot water, and gas all act to drive oil in front of the fire to production wells. Economic Estimates:

In addition to the engineering design cost, estimates of several other major  costs have to be evaluated: The cost to acquire a lease The cost of inflation The cost of unanticipated events (stuck drill string) Cost of capital It consists of direct costs and indirect costs.

Direct costs:

1. Rig cost. 2. Drilling cost. 3. Purchased equipment installation. 4. Piping. 5. Electrical systems. 6. Service facilities like steam, water, and power. Indirect costs:

1.

Engineering and supervision It includes engineering costs – 

administrative, process etc. 2.

Legal expenses: Identification of applicable federal, state and local

regulations Acquisition of Regulatory approval. 3.

Construction expenses: Construction, operation and maintenance of 

temporary facilities

like offices, roads, medical etc.

4.

Contractor’s fee: It varies for different situations.

5.

Contingencies: Because of unexpected events such as storms, floods,

transportation accidents, strikes, price changes it will increase the cost of the project. Manufacturing costs:

All expenses are directly connected to manufacturing operation. These expenses are divided into three classifications. Variable production costs: This type of costs include expenditure for raw

materials

including

transportation,

direct

operating

labor,

supervisory,

maintenance and repairs. Fixed charges: Fixed charges expenses practically independent of production

rate. Expenditures for depreciation, property taxes, insurance, financing (loan interest) etc. Depreciation: It is a charge to the revenue resulting from an investment in real

 property. It includes costs of equipment, buildings etc. Plant over head costs: It includes hospital and medical services, special

employee benefits, R&D. Objectives of Economic Analysis:

•

Apply economic and risk management evaluation tools for the oil & gas  project proposals.

•

Identify and quantify key uncertainties during field development and full life cycle economics.

•

Calculate the economic and financial viability of expenditure proposals  projects under risk conditions.

•

Develop a structured approach to measuring, managing and combating commercial risk.

•

Assess the ranking of alternative projects.

•

Prepare convincing project proposals in a way that will win management,  partner and government approval.

•

Improve project and business outcomes.

Key Points

• identifying project cash flows and sources of information • Project payback  • Net present value (NPV) • Internal rate of return (IRR) and the cost of capital • Profitability index (PI) •

Project ranking – how to choose the best alternative

•

How to optimize expenditure

•

How to deal with inflation and with exchange rates

•

Taking account of taxation

•

Accounting measures vs. economic measures • understanding other financial criteria for decision making • Balancing short-term vs. long-term business objectives Economics, risk & decisions - decision points are risk points

• Decision points for oil fields and gas fields • Risk & probability definitions and concepts • Risk identification, measurement & management • Forecasting as risk management • Assumptions, sensitivities & risk premium

•

Exploration & appraisal decisions, uncertainty, risk and exposure Monte Carlo Simulation

•

Economic models & spreadsheet design

•

Development decisions

•

Work scope definition and options

•

Decommissioning economics & risks

•

Cost estimating and contingencies

•

Financing options

•

Construction contracts

•

Further development decisions & economic cut off 

•  preparing convincing project proposals •

Post project appraisal

Capital budgeting:

Capital budgeting is the process of making investments decisions in long-term assets or courses of action. It is the planning of expenditure and the benefit, which spread over a number of years. Techniques:

1) Pay back period method. 2) Average rate of return or Accounting rate of return 3) Net present value method 4) Internal rate of return method 5)Profitability index method Payback period:

It is the simplest method evaluating investment proposals. Payback period represents the number of years required to recover the original investment. The pay   back period is also called payout or payoff period. This period is calculated by dividing the cost of the project by the annual earnings after tax but before depreciation.

Original cost of the project Payback period = __________________________  Annual cash inflow

Net present value method (NPV):

The net present value (NPV) takes into consideration the time value of money.  Net present value is the difference between the present value of cash inflows of a  project and initial cost of the project.

 NPV = Present value of cash inflows - Investment

Cash inflow Present value = ____________  (1 + r)n

r = discounting rate

n = year 

The Internal Rate of Return (IRR):

Is a capital budgeting method used by firms to decide whether they should make long-term investments. As an investment decision tool, the calculated IRR should not be used to rate mutually exclusive projects, but only to decide whether a single project is worth investing in. In cases where one project has a higher initial investment than a second mutually exclusive project, the first project may have a lower IRR (expected return),  but a higher NPV (increase in shareholders' wealth) and should thus be accepted over  the second project.

A method called marginal IRR can be used to

adapt the IRR methodology to this case. P1 -Q IRR

= _____________ * D L +

P1 – P2

L = lower discounting rate

P1 = present value of earnings at lower rate

P2 = Present value of earnings at higher rate

Q = Actual investment

D=difference in rate of return

POLITICAL CONTRACTS

Fortunately and unlike the marketing and pricing of petroleum products, there is no controversy over the policy towards the exploration and production of  hydrocarbons in India. Successive governments of all political complexions have endorsed the importance of engaging the private sector and in allowing the market to determine the commercial and fiscal terms. All have accepted that risk capital conjoined with “leading edge” technology offers the best chance of harnessing our  indigenous oil and gas resources. The challenge has been to secure both in the face of  the increasing availability of exploration opportunities worldwide DISCUSSION AND CONCLUSION

Petroleum is basically a strategic mineral.

In order to carry out the

exploration in a new area, the mining lease for the area required has to be obtained. This job is done by the exploration company which carries out the exploration in that area.

After the mining lease is obtained, the exploration activity in the area

commences. Before undertaking the task of petroleum exploration in any area, geological and geophysical surveys are done to find out the type of the rocks present, environment in which the have been deposited, thickness of the sediments in the  particular area that could be expected in the sub-surface, occurrence of suitable traps and presence of oil gas seepages. If some positive results are obtained, then that area is recommended for exploration for oil and gas. As is known, the oil well drilling is a very costly gamble and unless and until some positive indications are present, the   particular area cannot be taken up for drilling. Even if the majority of the factors

which are responsible for the generation and the accumulation of the petroleum being   present, but if the formation of the trap takes place after the migration of the hydrocarbons, that structure, all though may be very good, can be barren. This could  be known only after the drilling in the area takes place. The methods employed for  oil finding and surveys under taken are, direct indications, geological, geophysical, geochemical methods

REFERENCES ONGC Academy Sponsored Training Programme Course Material on “ Prospecting for Unconventional

Reservoirs”, Organized by Delta Studies

Institute, Andhra University, Visakhapatnam. Oct. 30 – Nov. 3, 2006.

A. K. Sethi, A. V. Sathe and M. V. Ramana, (2004) Potential Natural Gas Hydrates

Resources in Indian Offshore areas. Amer. Asso. Petro. Geol, Hedberg Conference “Gas Hydrates: Energy Resource Potential and Associated Geologic Hazards ” Vancouver, BC, Canada. Proc. AAPG, Sept, 2004. 12-16, 1-6.

Sawyer, W.K., Zuber, M.D., Kuuskraa and Horner, D.M., (1987),

Using

reservoir simulation and field data to define mechanisms controlling coalbed methane production, Proceedings, Coalbed Methane Symposium, Tuscaloosa,

Australia, pp.295-307.

www.petrostrategies.org/Learning%20Center/Production.htm - 49k -and lecture note of  M.Tech (PE) by V.R.Rao