1. 1 Oil and Gas Industries Delivered to: Bill Pyke Hilbre Consulting Limited, October 2012 Oil and Gas Development and Production

2. 2 Outline Offshore Developments Producing oil and gas wells and surface facilities Transportation; pipelines and tankers The cost of production

3. 3 Exploration & Production Sequence Application & Award of Permit - Licencing Exploration – Prospect Identification Exploration – Exploration Drilling Appraisal of Discovery - reduce the uncertainties Development – FEED studies design & build surface facilities, devt drilling Production $m. 1-20 1-3 2-15+ 100- 1000’s 0-10+ Yrs 0+ 1 1+ 1-3 1-4 10+

4. 4 Funds flow in Upstream Operations Exploration Development Operating Tax & Royalty Allowances Net Revenue Gross Revenues

5. 5 The Progress from Discovery to Development The exploration phase involves drilling of discovery wells. The additional wells are referred to as appraisal or delineation wells. They are required to provide more information on the size, shape and petroleum volumes in the field. On declaration of a commercial discovery, a plan of development is put in place. The type of development depends costs, environmental conditions and prevailing legislation.

6. 6 Drilling in Offshore Oil and Gas Fields The early discoveries of oilfields were made in The United States and Baku in the Caspian region in the later parts of the 19 th century. These operations entailed the drilling of a large number of closely-spaced wells. In the earlier part of the twentieth century the oilfields in Oklahoma and West Texas were developed by so-called pattern drilling in which the producing wells were sited on an acre spacing grid. The evolution of improved reservoir management techniques and improving technology led to fewer wells being required. These wells were drilled from centralised surface gathering facilities. The technique of deviating wells enabled drillers to ‘steer’ their wells to designated subsurface target locations.

7. 7 7 Drilling Technology 1925 Drilling in Oklahoma in the 1920s

8. 8 Offshore Development Options Source: Natural History Museum /UKOOA

9. 9 Deep Water Fixed Steel Jackets Deepwater Jackets similar to the one above have been used to develop reserves in water depths in the range of 250- 350metres in the Gulf of Mexico

10. 10 North Sea Oil Production Platform Flare Boom Drilling Rig Oil risers Helideck Accommodation Modules

11. 11 Production Wells: Development With Deviated Drilling Programme Source: Britain’s Offshore Oil and Gas, UKOOA/ Natural History Museum(1997)

12. 12 A generic North Sea field area overlain on a central London map Source: Britain’s Offshore Oil and Gas, UKOOA/ Natural History Museum(1997)

13. 13 Floating Systems Source: Total

14. 14 Onshore Production

15. 15 Oil & Gas Recovery Concepts Oil/Gas occupies pore spaces in sedimentary rock Extraction leads to voidage replacement by water (below the oil horizon) in the oilfield or gas (above the oil horizon) in the oilfield Natural oilfield recoveries are referred to as primary recovery and are dependent on the energy and physical conditions in the oilfield. Recoveries range from 10-35%. Water and/or gas injection can increase recoveries and known as secondary recovery Natural gas recoveries are commonly much higher than oil; 70-85%

16. 16 Recovery Recovery influenced by:- Natural reservoir conditions: porosity and permeability Nature of the petroleum fluids: oil, gas, NGLs and condensate Prevalent economic conditions: costs and prices Location of oil/gas field

17. 17 Recovery (2)- Global Figures Oil resource/endowment 11 trillion barrels (11x10 12 barrels) Proven Reserves 1.4 trillion barrels (1.4x 10 12 barrels) Historic Global Recovery factor 11%, 89% still in the ground! Current global-averaged field recovery factor 22% Improved/enhanced recovery could get to 70% recovery Each 1% improvement yields 100billion barrels which is 5 years global supply

18. 18 Behaviour of Reservoir Fluids in Production Oil and Gas fields in production lead to changes in pressures, volumes and fluid content of the period of production Many fields have good natural recoveries based on high original pressures in the reservoir. A good aquifer provides support Recovery of petroleum volumes (reserves) can often be enhanced

19. 19 October 2012 Primary Recovery

20. 20 The Natural Drive Mechanisms for Recovery (1) Bottom and Edge Water Drive The aquifer system underlying the hydrocarbon accumulation provides the energy for driving hydrocarbons to the well bore. Combination Drive Both the aquifer and free gas both provide the energy to drive hydrocarbons to the well bore. Edge drive Bottom drive

21. 21 The Natural Drive Mechanisms for Recovery (II) Gas Cap Drive This type of Reservoir has no aquifer system. It consists of a saturated oil with a gas cap. A free gas phase is in equilibrium with the oil Acting like a piston the expanding gas cap drives down into the Reservoir sustaining the production rates of the oil wells. Gas Cap Drive

22. 22 Porosity and Permeability

23. 23 Reservoir Pressure Trends for Reservoirs Under Various Drives Reservoir Pressure Trends for Reservoirs Under Various Drives 20 40 60 Oil Production - % of Original Oil-in-Place Reservoir Pressure - % of Original 80 40 100 60 20 0 0 Water Drive Gas Cap Drive Dissolved Gas Drive Dissolved Gas Drive

24. 24 October 2012 Secondary Recovery

25. 25 Secondary Recovery Source: Technip

26. 26 Example: Ghawar Oilfield, Saudi Arabia Source: Saudi Aramco

27. 27 Improvements with Secondary Recovery Handil Oilfield, Indonesia BPMigas, 2006

28. 28 Recovery Targets for the Major North Sea Operators Percentage Recovery 38% 45% 57% 64% Historically 38% of in place volumes was considered a typical North Sea recovery factor. With modern technology and cost efficient methods the recovery factors can approach, and even exceed, 60%.

29. 29 October 2012 Enhanced Recovery

30. 30 Enhanced Recovery (EOR ) Additional energy is often needed to enhance the production rate and ultimate recovery of reserves. Some Examples; Miscible Flood CO 2 Miscible Flood WAG Foam+CO 2 Thermal Steam Flood Fire Flood Injection Chemical Injection Fracturing

31. 31 Thermal Recovery -Steam Injection Steam reduces viscosity of heavy oil and improves recovery Used in many fields in onshore California, Indonesia

32. 32 Steam Injection, Indonesia BPMigas, 2006

33. 33 Enhancing Recovery- “Fracking”

34. 34 Production Profiles

35. 35 Reserves and Production Profiles Reserves are a stock (inventory) asset Production is flow and therefore a revenue stream Translating reserves to production involves costs- capital, operating and transport Reserves = Production rate x time Ultimate reserves are a function of:- Prices Costs Field characteristics and performance Type of petroleum Location

36. 36 The Recovery Factor and the Production Profile 1) Physical Conditions - Drive System - Reservoir Quality - Enhanced Recovery - Reservoir Compartmentation - New Reserves 2) Commercial/Financial Aspects - Market - Transport - Price - Operating Cost 3) Environmental Aspects - Restrictions on production rate - Flaring?

37. 37 The Production Decline Curve Method From existing history the estimator will use a methodology which incorporates producing wells, gas lift installation, workovers, effect of the reservoir drive mechanism. Four types of decline curve generally exist: - Linear - Exponential - Hyperbolic - Harmonic Most production rate/time graphs have been found to exhibit exponential or hyperbolic decline.

38. 38 Production Profile Options Production Time Plateau Rate Small Gasfield Profile Rapid Production Oilfield Profile

39. 39 Baseline Production Profile

40. 40 Cash Flow Profile

41. 41 Economic Cut-off Production Rates For Cessation of Production 1000 2000 3000 4000 5000 6000 7000 8000 Days in Production Production Rate/Day Log Scale UKCS FPSO 6000 bopd Onshore Field Eastern England 100 bopd Stripper Well, Oklahoma 13.65 yrs2.74 yrs 10000 100 100000 1000 10 0 21.91 yrs

42. 42 Categories of Supply Cost (Global Average in Brackets) Finding- Exploration: lease costs, exploration & appraisal wells seismic, overheads ($3-5/bbl) Developing- production wells, surface plant, export pipelines ($17/bbl) Production-lifting and related operating costs ($8/bbl) Transportation and Tariff- export pipeline, shipping costs ($2/bbl) Abandonment: decommissioning costs at the end of production ($2/bbl)

43. 43 Global Benchmarks for Supply Costs $/boe

44. 44 Pipelines

45. 45 Forties Pipeline System U.K. North Sea Source: BP

46. 46 European Oil and Products Pipeline Network

47. 47 BTC Pipeline

48. 48

49. 49 Oil Tankers

50. 50 Marine Tankers and Worldscale Rates The world tanker fleet had 4,186 vessels with a carrying capacity of 358,800 dwt. 84% of the tanker fleet were owned by independent tanker companies. The average age of the fleet was 11.9 years. World Scale Freight Index used as a starting point for negotiating costs World scale 100's, reflect application of tanker operating cost assumption to the ports and distance/steaming time on route. These “flat rates” appear in US dollars per ton of cargo. The freight for a given ship and voyage is normally expressed in a percentage of the published rate and is supposed to reflect the freight market demand at the time of contract

51. 51 Source, McQuillan Services, New York, March 2008

52. 52 SourceDestinationVolume Barrels Worldscale Rate Freight Cost $/barrel West AfricaU.S. Gulf of Mexico 400,00074$2.27 West AfricaNorthern Europe 910,00074$1.61 Arabian Gulf Northern Europe 1,900,00036$1.51 Arabian Gulf Japan1,750,00048$1.60 Source: Drewry Shipping Consultants, February 2009 Comparative Marine Tanker Transportation Costs