If the decision is to continue a further investment

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Unformatted text preview: on-making in the upstream is characterised by risk and uncertainty as indicated in Chapter 3. The figure indicates the points at which investment decisions are taken to proceed with or to abort the project. If the decision is to continue, a further investment decision must be taken on whether to invest in the gathering and analysis of additional data in order to assess better the risk and uncertainty (at abandonment, the decision is not whether to abandon but when and how to do so). At any of these decision points, the consequences of that investment decision on all the subsequent processes, right through to the abandonment phase, need to be estimated and considered in the investment decision-making. For example, when a company is considering drilling a further appraisal well in a field, an estimate of the total recoverable reserves from the field needs to be produced and used as input to the economic analysis (Lohrenz and Dickens, 1993). The economic analysis will then model the cash flow throughout the project’s life including a prediction of when the field will be abandoned and the estimated cost (Simpson et al., 2000). The upstream oil and gas industry shares with some other businesses, such as the pharmaceutical industry and aerospace engineering, typically long payback periods. Payback is defined as the length of time between the initial investment in a project by the company and the generation of accumulated net revenues equal to the initial investment (figure 5.2). In the oil industry, this period is typically between ten to fifteen years. 74 Economics Environment Abandonment Timing decision ? Infill drilling 4D seismic ? when Ullage Pressure maintenance Production Operations Decisions ? Well maintenance / Economics ? intervention Development engineering Development £500M decision Production rates Economics Log analysis Facilities ? Sequence stratigraphy Economics Prospect definition and map Seismic ? Reservoir engineering Risked economic value EMV ? Appraisal drilling structural geology Drill/no drill £10M decision Risk Uncertainty y Gravity Estimated reservoir properties Economics ? Hydrocarbon Potential £2M decision Regional geology Magnetics Figure 5.1: The upstream oil and gas industry: a multi-stage decision process For example, in the North Sea there is an average gap of seven years between initial exploration expenditure and the commitment to develop a prospect. It takes another three or four years to get to the point when oil is actually produced and then fields normally produce for around twenty years before they are abandoned. (It should be noted that currently average lead times are being reduced through the wider availability of infrastructure and technology). 75 Most of the main costs or cash outflows are incurred in the earlier, exploration and development, years while the cash inflows or revenues are spread over the active productive lifetime of the field. This makes economic modelling particularly difficult since at each investment decision point indicated in the...
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This document was uploaded on 03/30/2014.

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