However as the reservoir pressure declines because of

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high natural differential pressure drives hydrocarbons toward the well and up to surface. However, as the reservoir pressure declines because of production, so does the differential pressure. When the reservoir pressure is so low that the production rates are not economical, or when the proportions of gas or water in the production stream are too high, secondary or tertiary recovery methods may be used. Secondary recovery consists of injecting an external fluid, such as water or gas, into the reservoir through injection wells located in rock that has fluid communication with production wells. The purpose of secondary recovery is to maintain reservoir pressure and to displace hydrocarbons toward the wellbore. Tertiary recovery (or enhanced oil recovery) involves the use of sophisticated techniques that alter the original properties of the oil. Enhanced oil recovery can begin after a secondary recovery process or at any time during the productive life of an oil reservoir. Its purpose is not only to restore formation pressure, but also to improve oil displacement or fluid flow in the reservoir. Figure 1. The Project Cycle Production Start of Production Lease Exploration Development Closure Post-Closure Recovery End of Production Lease is returned
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Although many of the variables that affect the profitability of a petroleum project are beyond the control of both the host government and the investing companies, the host government can take actions to minimize uncertainty. Options include providing poten- tial investors with access to existing geological and geophysical data; strengthening macro- economic and fiscal stability; improving transparency and the rule of law; promoting contract stability; and signing/ratifying relevant international conventions. Project uncertainty correlates directly with the cost of the investment: reducing uncer- tainty results in a reduction of the cost of capital, which in turn increases the rent potentially available for taxation. Risk management is a key feature of the oil industry. Companies hedge against risk by investing in a diverse portfolio of projects and by involving multiple partners. Countries may not have the same ability to diversify their investments. Hence they hedge against risk by establishing flexible fiscal systems 5 and transferring part of the risk to oil companies. Fiscal Systems for Hydrocarbons 5 5. See Chapter 5 below.
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CHAPTER 3 Legal Arrangements in the Petroleum Industry T he legal basis for hydrocarbon exploration, development and production is nor- mally established in a country’s constitution. 6 Normally, the hydrocarbon law, formulated at parliamentary level, sets out the principles of law, while those pro- visions that do not affect principles of law, or that may need periodic adjustments (such as technical requirements, administrative procedures, and administrative fees), are set in regulations.
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