Exploration and. Off and Gas. Production. t Edl'tiOnS TECHNIP 25 rue Cinoux, PARIS, FRANCE. Reserves, costs, contracts

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1 Nadine BRET-ROUZAUT and Jean-Pierre FAVENNEC Off and Gas Exploration and Production Reserves, costs, contracts Third edition revised and updated With contributions by D. BabusidUX (IFP Energies nouvelles) S. Barreau (IFP Energies nouvelles) P.R. Bangui's (Total) N. Bret-Rouzaut (IFP Energies nouvelles) A. Chetrit (Total) P. Copinschi (IFP Energies nouvelles) J.P. Favennec (IFP Energies nouvelles) R. Festor (Total) E. Feuillet-A/lidrier (IFP Energies nouvelles) A/I. Grossin (Total) D. Guirauden (Beia'p) V. Lepez (Total) P. Sigonney (Total) M. Valette (Total) The first edition of this book has been selected for inclusion in Choice s annual Outstanding Academic titles list. It has been rewarded for its excellence in scholarship and presentation, the significance of its contribution to the field, and its value as important treatment of the subject. Translated by Bowne Global Solutions Mr Jonathan PEARSE 2011 t Edl'tiOnS TECHNIP 25 rue Cinoux, PARIS, FRANCE

2 Table of contents Preface to the first edition V Foreword to the third edition VII l Petroleum: a strategic product l 1.1 Uses, importance, future Uses of petroleum through the centuries The importance of oil Historical background The large oil companies up until the First World war, early competition Between the wars: the role of the state Between the wars (2): cooperation and competition between oil companies. The example of the Turkish Petroleum Company After WWII: increasing oil consumption, new oil companies, creation and development of OPEC Weakening of OPEC and fall in prices The 1990s: market forces The twenty first century: sustained high prices The oil market and the oil price Physical parameters which affect the price of crude oil Mechanisms for setting the price of crude: history Economic analysis of price formation 51 i A Conclusion 60 2 Oil and gas exploration and production How hydrocarbons are formed Sedimentary basins Petroleum geology Petroleum system 65 IX

3 J3 2.2 Exploration for hydrocarbons Prospecting Geology Geophysics Exploration drilling Appraisal Development and production Reservoir management Reservoir simulation models Development drilling Directional drilling, horizontal drilling, multidrains Completion Well productivity Well interventions Processing of effluents Separation process Oil treatment water treatment Gas treatment: sweetening and dehydration 91 3 Hydrocarbon reserves Definitions Political and technico-economic constraints Deterministic and probabilistic estimates P90, P50, P10, etc P, 2P and 3P reserves Proven, probable and possible reserves Need for caution in using definitions Characteristics of reserves Conventional and non-conventional hydrocarbons Deep and ultra-deep offshore Heavy, extra-heavy oils and oil sands Oil shales synthetic oils (Fig. 3.3) Non-conventional gas The polar zones other types of non-conventional hydrocarbons The production of reserves The decision to produce Production profiles Hubbert theory of decline (Fig. 3.6) The impact of technical progress on the production profile Optimists and pessimists Two schools of thought Naturalists or economists? Ill Concluding remarks Ill 3.5 Geographical distribution of reserves and production North America South America 114 X

4 3.5.3 Europe Africa Middle East Former USSR Asia-Oceania 119 oj I investments and costs introduction costs classification Types of costs Examples of cost breakdowns Exploration costs Geophysics Exploration drilling Development costs The key stages prior to project authorisation Development drilling production and transport installations Methodology for estimating development costs Examples of developments Operating costs classification of operating Controlling operating 4.6 Mastering costs 156 costs 157 costs impact of technological progress impact of the economic cycle and the contractual strategy on project costs The petroleum services sector Historical background investment in exploration and production: the market for petroleum services 167 o.o Legal, fiscal and contractual framework The key issues Ownership of hydrocarbons and the sovereignty of the State over natural resources Forms in which exploration and production can be undertaken Regulatory options The content of petroleum legislation The objectives of the parties involved Reconciling objectives and sharing the economic rent Types of contract Breakdown of petroleum contracts by type Main provisions of a petroleum exploration and production contract General structure of a contract Technical, operational and administrative provisions Economic, fiscal, financial and commercial provisions Legal provisions Gas clause 192 XI

5 J3 5.3 Concession regimes General framework The main features 194 u 'o' 5.4 Production sharing contracts 199 JU & <s General framework The main components Other contractual forms service contracts Impact of the economic rent sharing on exploration and production activities Flexibility and investment incentives Comparison between systems Perspectives 210 js> Decision-making on exploration and production Strategic analysis and definition of the objectives of the company Understanding the environment in which the company is operating Strengths and weaknesses The portfolio of activities Alliances Strategy Department: organisation and functions Economic evaluation (deterministic) and snort-term decision-making Decision-making in relation to development and the deterministic calculation of the return Discount rate and the cost of capital Constructing a schedule of cash flows, operating cash flows, general remarks Evaluation criteria for investment projects: net present value (NPV) and rate of return Equivalent cost Financing mix and the equity residual method Acquiring participations, valuing a project Another approach to calculating the return on exploration/production projects: the Arditti method A new approach: the generalized ATWACC method A first step in dealing with uncertainty: sensitivity analysis An empirical criterion: payback period (duration of financial exposure) The decision to explore: introduction to probability The "exploration" data sheet Expected value Sequential decisions and conditional values Limitations applying to the expected value of NPV information, accounting and competition analysis Accounting principles Capital and operating costs Reserves Depreciation and provisions 250 Xtl

6 7.2 Competition Analysis in the upstream petroleum sector Supplemental information on oil and gas producing activities appended to the balance sheet indicators 258 Annexe to Chapter 7 Basic principles of financial accounting 265 7A.1 The balance sheet 266 7A.2 Profit 7A.3 Cash flow and loss account 268 statement 271 7A.4 The consolidated accounts Health, safety; the environment, ethics Risk in the industry Safety management The Piper Alpha accident Reducing risk Safety management systems Taking account of the environment The stages of environmental - - management: before during after "Before": the preparatory phase "During": the operating phase "After": the aftercare phase The integration of health, safety and the environment oil and ethics Ethical issues within the oil community Ethical issues involved in relations with host countries Major ethical issues: the environment and human rights 291 Bibliography 295 Glossary 299 Index 307 XIII