INTRODUCTION TO OIL/GAS BUSINESS

W Pao

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 Course Outcome

1. Conceptual design of petroleum production facilities (C, 23.5%)

2. Investigate the risk and feasibility of production facilities (C,
29.5%)
3. Analyze sub-systems of production facilities using appropriate
techniques/tools (C, 39%)
4. Adapt the compliance of facilities design to industry standards
(A, 3%)
5. Appreciate the continuous challenges of production facility life-
cycle (A, 5%)
 End of course, you shall …

1. Aware of the overall life-cycle of E&P activities

2. Have a conceptual understanding of where FETS sits in the big
picture
3. Aware of activities involved in development & implementation
4. Aware of different economic model for E&P
5. Know different cost estimating method
6. Be able to perform a high level estimate of project economic
feasibility
7. Appreciate the challenges involved and the need to
continuously improve
 Oil & Gas Food Chain

Facilities Engineering, Transportation & Storage, FETS

upstream downstream
midstream

Exploration and production Transportation, refinery, Distribution and retail

chemical processing

• Production technologists • Production engineers

• Production engineers • Mechanical engineers
• Subsea engineers
• Rotating
• Mechanical engineers • Statics
• Reliability
• Instrument & measurement
 Oil & Gas Food Chain

upstream midstream downstream

Exploration and production Transportation, refinery, Distribution and retail

chemical processing

40 years

Explore Appraise Develop Operate Abandon

Exploration Development Production

5 – 10 years 5 – 10 years 15 – 30 years
Opportunity Realization Process ORP
 Why ORP Important

Why is ORP important?

- Navigation of business
- Strategic position of project
- To inform and collaborate
- Coordination

Different MNC/NOC has different ORP in place.

It is important for MNC/NOC.

 Relation between ORP and E&P

Acquisition Exploration Developme Production Abandon

nt
 Overview of E & P Business

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 Bird’s Eye of E & P

Acquisition of Rights

EXPLORATION

Appraisal Appraisal
DEVELOPMENT

PRODUCTION Processing / Export

ABANDONMENT
 Acquisition of Rights

Acquisition of Rights To obtain permission from government

or relevant agency before drilling of
Exploration wells.
PROSPECTS
Prospecting Five sources (from highest success rates)
Open Partner NOC Strategic
1. Strategic partners 4. Others
Others(3)
blocks invitation(1) invitation(2) partner 2. NOC invitation 5. Open blocks
3. Partner invitation

Screening & Strategic Prioritisation SCREENING AND STRATEGIC PRIORITISATION

Obtain G&G technical information and execute preliminary assessment
of prospect’s attractiveness.
Evaluation
EVALUATION
Full technical-economic evaluation involving group of core expertise.
Bidding

BIDDING
Prepare and submit bid, form negotiation team and conclude deal.
Capture

• EV RESERVES implies the exploration success rate on

EV reserves Speculative Risk Resource (SRR) *applicable to exploration blocks
only.
(EV = Expectation Value)
 Block Acquisition Review & Decision Gate

Formal
Committee Purpose of Meeting Questions
Structure

Carigali • Endorse PIRC decision • What is PIRC’s decision?

Board (Project Inv. review committee)

• Management sanction
• Decision on project • Is the PIRC comfortable with the decision?
MD/CEO PIRC
viability & strategy

• QA/QC on macro levels • Does this project make sense for the country strategy
Head of DD TRC • What are PSC terms? Competitive implications?
• Project technical & commercial
viability (tech rev. committee)
Head of XD • QA/QC of G&G risks and • Does the field porosity make sense vs.
XRC volumetric assessment (exp.rev regional porosity?
committee) • Is 2P really xxMMboe?How was it calculated?
• QA/QC of G&G risks and
volumetric assessment (micro • Have you considered “x” in calculating reserves
Technical Peer Review
level) sizes?
Heads
 Exploration

Acquisition of Rights To obtain permission from government

or relevant agency before drilling of
Exploration wells.
EXPLORATION To search for oil and gas fields

This is a high risk activities and may constitute :

a). Gravity and Magnetic Surveys: Mapping of gravity and/or magnetic

anomalies due to the variations of the earth’s geological structures and
magnetic properties of rocks.

b). Seismic Survey : Seismic lines producing Coarse 2-dimensional seismic

grid reflecting the geophysical nature of the rocks etc.

c). Wildcat – Exploration well drilling

 Site Survey

Geological Survey Geophysical Survey

Develop a model pertaining to rocks wherein Measuring the properties of rocks in the
HC may occur based on an understanding of subsurface
the principles of geological processes
 Appraisal

Acquisition of Rights To obtain permission from government

or relevant agency before drilling of
Exploration wells.
EXPLORATION To search for oil and gas fields

To determine the commercial significance of

APPRAISAL the discovery and to shape the initial development
plan for the field.
 Appraisal

Seismic Well Tests PVT Cores/Geology

Petrophysics/ Logs

INTERPRETATION

RESERVOIR MODEL, STOIP, GIIP, NTG etc

+
ECONOMIC MODEL = Development strategy
 Consequent of Appraisal

Abandon EXPLORATION
Project Field Development
AND APPRAISAL Plan
Or Request for ACTIVITIES (FDP)
Extension
 Business Model

Business Model Remarks

Concessions Agreement E&P activities are determined by the contractors. The host
country only interested in the profits (profit sharing and
taxes)
Product Sharing Contract (PSC) E&P activities are performed by the (PSC) Contractors and
approved by the host country/agency. Costs are recoverable
through some mechanisms and profits are shared. Taxes
imposed.
Joint Venture Agreement E&P activities are jointly performed by the Contractors and
the host country. Costs and profits are shared based on
the agreed equities. Taxes are imposed
Service Contract Agreement E&P activities are performed by the host country
representative but some agreed scope of work are contracted
out to a Contractor. Costs are borne by
the host country. Contractor only benefits from the scope of
work they have provided. Taxes may be imposed.
 Development

Acquisition of Rights To obtain permission from government

or relevant agency before drilling of
Exploration wells.
EXPLORATION To search for oil and gas fields

To determine the commercial significance of

APPRAISAL the discovery and to shape the initial development
plan for the field.
To formulate the Field Development Plan, install
DEVELOPMENT
platforms / facilities, drill and complete the
development wells.
 Development

Drilling
Requirements

Production
Techniques

Facilities
Requirements

Development
Cost
 Development

Subsurface Plan Fluid Handling

 Reserves & Production Profile  Process and products
 No of platforms and wells  Transport, storage and export
 Production & fluid characteristics  Flow assurance
 Secondary recovery methods

Installation Method
 Availability of specialized vessels
 Cost and Schedule
 Jack-up or Tender Assisted rig
 Quality Control
 Risk and Safety

Environmental Constraints
 Distance to infrastructure
 Water depth
 Weather and seastate
 Geotechnical (soil)
 HSE
 Production

Acquisition of Rights To obtain permission from government

or relevant agency before drilling of
Exploration wells.
EXPLORATION To search for oil and gas fields

To determine the commercial significance of

APPRAISAL the discovery and to shape the initial development
plan for the field.
To formulate the Field Development Plan, install
DEVELOPMENT
platforms / facilities, drilling and completion of the
development wells.
PRODUCTION To bring oil/gas from sub-surface to surface (drill
and complete wells) and separate gas/oil/water
before oil is stored and gas is processed.
 Production

Production Separation GAS

From and
Well Treatment
OIL DISPOSAL EVACUATION

Covered the
processes applied
WATER EVACUATION & STORAGE
to
in preparation for

DISPOSAL

Reservoir fluids mixture have to be separated & treated for disposal before the oil
& gas can be exported
 Processing/Export

Acquisition of Rights To obtain permission from government

or relevant agency before drilling of
Exploration wells.
EXPLORATION To search for oil and gas fields

To determine the commercial significance of

APPRAISAL the discovery and to shape the initial development
plan for the field.
To formulate the Field Development Plan, install
DEVELOPMENT
platforms / facilities, drill and complete the
development wells.
PRODUCTION To bring oil/gas from sub-surface to surface and
to separate gas/oil/water before oil is stored and
gas is processed.
Processing / Export To condition the gas/oil and sell to customers.
 FETS

Acquisition of Rights

EXPLORATION

APPRAISAL

Development and Implementation

DEVELOPMENT Facilities Engineering, Transportation
Storage and Metering (for Export)
Falls under these phases of the E&P
PRODUCTION business

Processing / Export

Decommissioning Abandonment
Decommissioning
 Decommissioned Projects in Malaysia

Baram-8 Samarang-4
collapsed well platform
and structure

Malaysia Decommissioned Platform

Ketam platforms
(1st in Malaysia)
 A small exercise

Can you recall the workflow of E&P Cycle?

 Development & Implementation Act

© 2015 INSTITUTE OF TECHNOLOGY PETRONAS SDN BHD

All rights reserved. No part of this document may be reproduced, stored in a retrieval system or transmitted in any form or by any means (electronic, mechanical,
photocopying, recording or otherwise) without the permission of the copyright owner.
 Field Life Cycle

Acquisition Exploration Developme Production Abandon

nt
Data Review
Seismic/drilling studies
Project planning
Feasibility study
Conceptual design
OUR FOCUS
Detail design
Procurement
Fabrication
Drilling
Hookup & commissioning
Revisit/new opportunities

Abandonment

TIMELINE

First production

Timeline very much dependent on oil price. High price, high speed
 ORGANIZING THE DEVELOPMENT PROJECT

Project Conceptual Project Design

Execution
Initiation Design Definition Engineering
Project description a. Process Block Diagram a. Process Flow Sheet a. Mechanical drawing a. Rehearsal
will be given to b. Preliminary Cost Analysis b. Workload breakdown b. Vessel spec b. Every spec connected
you shortly c. Study relevant topics c. Layout Drawings c. Flowline spec c. Every one agreed
d. Specify in/output d. Skid design d. Put things together
e. Economic Feasibility
 E & P Business Costing

© 2015 INSTITUTE OF TECHNOLOGY PETRONAS SDN BHD

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Costing – The Big Picture
 Breakdown Component of LCC

Purchase, Admin./Engng
Acquisition Transportation, Installation
Costs Training, Conversion

Operating Direct labor, Utilities, Consumables,

Costs Waste disposal, Admin./Engineering
Spare parts

Scheduled Materials & labor, Scheduled PM,

LCC Maintenance Costs of Repair, Fixed labor cost
Maintenance
Costs Lost of Production

Materials & labor, U/sch Breakdown

Unscheduled Costs, Repair Costs, Spare Part/yr,
Maintenance Lost of Production

Conversion/ Conversion Costs, Decommissioning

Decommission Costs, Salvage costs, Cleaning Costs,
Waste/Product disposal
 Costing

a. CAPital EXpenditure (CAPEX)

Exploration – Seismic Survey
- Exploration wells
Appraisal wells
Platforms / Jackets
Development Wells
Production Facilities
Pipelines – inter-platforms & to shore
Terminals & Export facilities

b. OPerating EXpenditure (OPEX)

c. Abandonment Costs.
Facilities Mothballing & Removal,
Wells plugging & Facilities Removal
 Life Cycle Cost

Life Cycle Cost

= CAPEX (capital expenditure)

+ OPEX (operating expenditure)

+ RISEX (risk expenditure)

+ RAMEX (reliability, availability and maintainability expenditure)

 Cost Estimation

Cost Capacity Estimation

• Order of magnitude estimation
• Accuracy pm 30%
• Usually at early stage of screening

Factored Estimation
• Based on several cost-driving factors e.g. cost of materials, oil prices etc
• Factor transformed into ‘weights’ on basic cost data

Work Breakdown Structure

• Commonly used in budget estimation
• Applicable when sufficient data and details are available
• More accurate
 Capacity Estimate

x
 Qest 
Cest  Cknown  
 Qknown 
Cest = Estimated cost, Cknown = Known cost; Q = capacity

It is a simple and linear escalation model. The higher x, higher

escalation

Proof: x
C2  Q2 
    y  x n  ln y  n ln x  y*  mx * c
C1  Q1 
 Factored Estimation

C  f1  f 2  ...  f k  Co  Cmisc

f = factor

It is also a simple and linear model.

It assumes that the variation of the estimated cost is the

consequence of interplay between different driving factors on
the basic cost.
 Factored Estimation - inflation

Ct arg et  Cbasic  1  r1   1  r2   ...  1  ri 

Ctarget = cost of target year
Cbasic = cost of basic year
r = inflation rate between target and base year

Example: Item A cost $100 in 2007. Inflation in 2007 and 2008

are 3% and 4%, respectively. Cost of item A in 2009 is

C2009 = 100*(1.03)*(1.04) = 1.0712 or $107.12

Where does inflation comes from?

 Factored Estimation

Development region – availability of technology, weather, unskill,

semi-skilled and skilled labor, qualified engineers/managers,
productivity per capita, capital

Distance/terrain – pipeline/umbilical length and design

Reservoir characteristics – pressure/temperature rating

Internationalization/culture/religion – good relations with business

partners, trust, political stability, hidden costs
 Work Breakdown Structure

Definition: A deliverable-oriented hierarchical

decomposition of project total of the work to
be executed by the project team to
accomplish the project objectives and create
the required objectives. It defines and
organizes the total scope of the
project.

Breakdown the workload level by level into

smaller pieces of manageable deliverables.

It is a pyramid system

Usually after all the facts are gathered.

Work Breakdown Structure
OPEX
 A small exercise

Q1: What are the major expenses in E&P?

Q2: Can you recall the 3 method of Cost Estimate?

 Planning for Project Feasibility

© 2015 INSTITUTE OF TECHNOLOGY PETRONAS SDN BHD

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photocopying, recording or otherwise) without the permission of the copyright owner.
 Fundamental of Resource Economics

Capital Revenue

Re-investment

Start here Debt + interest

DEBTHOLDER

Dividends
SHAREHOLDER

Money has to come from somewhere from somebody

 Costing Dependent on Petroleum Licensing Agreement

Fiscal Agreement

Contract Based Concession

(Royalty/Tax)

Service Production Sharing

Agreement Contracts

Pure Risk
Service Service
 Difference between …

Features Concessions Contracts

Ownership of resources Government Government
Title transfer point At the wellhead At the export point
Company entitlement Gross production less royalty Cost oil & gas + profit oil & gas
Entitlement % Typically 90% Typically 50-60%
Ownership facilities Company Government
Management & control Less government control Direct government control and
participation
Financial obligation Company 100% Company 100%

• Concession arrangement between Government and oil Company – produced oil belongs
to the company. Government gets payment in form of taxes etc.

• Old style, 1950’s, middle east

• Not fair and too much control for the company

• Gradually replaced after WW II

 Typical Concession Split

Production
100

Deduction Profit oil Royalty

35 45 20

Company after tax Profit tax

27 18
41.5% 58.5%
Total to Company Total to Government
35 + 27 38
 Difference between …

Features PSC Service Contracts

Project type All types All types, often non-exploration
Facilities ownership Government Government
Company entitlement Cost oil + profit oil None, may have preference
right to purchase
Entitlement % 50-60% None
Hydrocarbon transfer Delivery/export point None
Financial obligation Contractor 100% Contractor 100%
Government participation Common Very common
Cost recovery Usually Sometimes
Government control High High
 Typical PSC split

Production
100

Cost oil 40 Profit oil 50 Royalty 10

Company Govt
15 (@30%) 35 (@70%)

After tax 9 Profit tax 6

15% 85%
Total Company 49 Total Govt 51
 Summary of Business Fiscal Model

Business Model Remarks

Concessions Agreement E&P activities are determined by the contractors. The host
country only interested in the profits (profit sharing and
taxes)
Product Sharing Contract (PSC) E&P activities are performed by the (PSC) Contractors and
approved by the host country/agency. Costs are recoverable
through some mechanisms and profits are shared. Taxes
imposed.
Joint Venture Agreement E&P activities are jointly performed by the Contractors and
the host country. Costs and profits are shared based on
the agreed equities. Taxes are imposed
Service Contract Agreement E&P activities are performed by the host country
representative but some agreed scope of work are contracted
out to a Contractor. Costs are borne by
the host country. Contractor only benefits from the scope of
work they have provided. Taxes may be imposed.
 Feast of Fury

So, who takes what …?

54
 Split of Barrel under PSC
Govt

Revenue A Royalty
-
Royalty B
10% of A Contractor
-
Cost Recovery C
Cost Recovery NOC
Max 50% of A

= +
Profit Oil
Profit Profit
(A)-(B)-(C)
= =
Entitlement Entitlement
- +
Tax Contr tax paid
- - +
Expenses Tax NOC tax paid
= Contractor =
NOC NCF = Govt NCF
NCF
Costing – The Big Picture
 Project Life Cycle

Pre-Dev Build-Up Plateau Decline Abandon

PRODUCTION
ENVELOP

Time
POTENTIAL PROJECTS : Funding Requirements
NEW PROJECTS : High Capital Spending
YOUNG PROJECTS : Cash Generating
AGEING PROJECTS : Self Financing

ACQUISITION OPERATIONS &MAINTENANCE ABANDONMENT:

Cash Sink
 Example

A) Carry out an economic feasibility study of the following project:

-Drilling platform $480M
-Pipeline + facilities lump sum $80M
-Tender Assisted Drilling Rig $200K/day
-Number of wells 10, estimated 30-day per well
-Forecast average production rates Year Avg Prod. (BOPD)
1 5K
2-6 15K
7 10K
8 3K
9 1K
10 Shut-in

-Assume: forecasted crude price $100 per bbl, OPEX ~ 10% of CAPEX,
completion of facilities in 3 years
 cont

Soln:
CAPEX & OPEX Calculation
Items Cost ($M)
Drilling platform 480
Pipeline + facilities 80
Rig rental per day (200K per day) x 30 days 60

CAPEX 620
OPEX (10% CAPEX) 62/yr
 cont

Soln:

Year
A1. Prod Forecast kBOPD Taken from production forecast 1000 Bbl per day
A2. MMBLS per year A x 365 day
A3. Revenue per year B x Oil price, unit in MMUSD
A4. CAPEX From previous calculation (620)
A5. OPEX From previous calculation (62 per year)
A6. Net Cash Flow Revenue – CAPEX – OPEX (A3 – A4 – A5)
A7. Cumulative Cash Flow Sum of A6 from all previous years
 cont

Soln:
 cont

Soln:

Terminal cash flow

Breakeven

Maximum exposure
 cont

B) Repeat the problem if profit is to be split 30:70 for Company A and the cost of recovery
is 20% per year. Analyze the project viability.
Soln
B1. Revenue Copy from A3
B2. Minus 10% Royalty 0.1*B1
B3. Minus Cost Recovery 20% CAPEX*0.20 per year for 5 years
B4. Minus OPEX Copy A5
B5. Net Profit Oil (100%) B5 = B1 – B2 – B3 – B4

C1. Capital Recovered Copy from B3

C2. OPEX Recovered Copy from B4
C3. Incurred Losses on Non Copy from B5 if it is losses
Profit
C4. 30% Share of +ve profit B5 * 0.3 if it is positive
C5. Total Net cash to Company C5 = C1 + C2 + C3 + C4
C6. Cum Net Cash Sum from previous year
cont
cont
 Q&A
© 2012 INSTITUTE OF TECHNOLOGY PETRONAS SDN BHD
All rights reserved. No part of this document may be reproduced, stored in a retrieval system or transmitted in any form or by any means (electronic,
mechanical, photocopying, recording or otherwise) without the permission of the copyright owner.