Assignment on

Petroleum Economics

PES-203-PROSPECT EVALUATION &

PETROLEUM ECONOMICS

U N IT E D N A T IO N S E C O N O M IC C O M M IS S IO N F O R E U R O P E

G U ID E L IN E S
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U N IT E D N A T IO N S IN T E R N A T IO N A L F R A M E W O R K
C L A S S IF IC A T IO N F O R R E S E R V E S /R E S O U R C E S
- S o lid F u e ls a n d M in e r a l C o m m o d itie s -

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 CONTENTS

• INTRODUCTION TO PETROLEUM ECONOMICS

• METHODS OF RESOURCE PROGNOSTICATION

• RESERVE CATEGORIZATION , ESTIMATION,AND ECONOMIC

FORCASTING

• TECHNOECONOMIC STUDIES: SIMULATION TECHNIQUES

• DISCUSSION AND CONCLUSION

INTRODUCTION

The probability of well finding petroleum is only one aspect of successful

exploration, since the objective of exploration and exploitation is to make money,
which will add to the economic enhancement of country involved and to
development. This exploration activity, starting from exploration to final exploitation
involves several risks. To achieve the final goal, the risk involved and potential
profitability must be established, both for individual prospect and for a string of a
wells. According to the “gamblers’ ruin” law, there is chance of going broke because
of a run bad luck, irrespective of long term probability of success. Whether a gambler
(company) is ruined before being commercially successful depends both on
probability of geological success and four commercial parameters

Potential profitability of venture

1. Available risk investment funds
2. Total risk investment
3. Aversion to risk

Greenwalt (1982) has shown that some of these parameters may be quantified:

1-S= (1-Ps) N
Where;

S= aversion of risk
Ps= probability of geological success
N= number of ventures necessary to avoid companies ruin

Further, and much more elaborate, aids to exploration decision making

involve more sophisticated quantification of these commercial parameters. Computer
simulation technique may then be used to aid the decision of weather or not to embark
on an exploration venture, and, if so, to determine the amount of risk the investors’
finances can tolerate. Such economic considerations lie beyond the field of geology,
although they are extremely important aspect of petroleum exploration.
 The exploration and production of petroleum involves various commercial
as well as non commercial aspects than need to be balanced economically to be
successful. It is being well defined that:
"The integration of economic theory with business practice for the purpose
of facilitating decision-making and forward planning by management.” is the key to
success. To serve these objectives “Managerial Economics” is the discipline, which
deals with the application of economic theory to business management. Managerial
Economics thus lies on the borderline between economics and business management
and serves as a bridge between the two disciplines. (See Chart 1)

Economics, Business Management and Managerial Economics

Economics – Theory Business

and Methodology Management
- Decision problems

Managerial Economics
-- Application of
economics to solving

Optimal Solutions to
business problems
Chart 1

Characteristics of managerial economics

It would be useful to point out certain chief characteristics of Managerial

Economics, inasmuch as they throw further light on the nature of the subject-matter
and help in a clearer understanding thereof.

First, Managerial Economics is micro-economic in character. This is because

the unit of study is a firm; it is the problems of a business firm, which are studied in it.
Managerial Economics does not deal with the entire economy as a unit of study.

Secondly, Managerial Economics largely uses that body of economic concepts

and principles which is known as ‘Theory of the Firm' or 'Economics of the Firm'. In
addition, it also seeks to apply Profit Theory, which forms part of Distribution
Theories in Economics.
 Thirdly, Managerial Economics is pragmatic. It avoids difficult abstract issues
of economic theory but involves complications ignored in economic theory to face the
overall situation in which decisions are made. Economic theory appropriately ignores
the variety of backgrounds and training found in individual firms but Managerial
Economics considers the particular environment of decision-making.

Fourthly, Managerial Economics belongs to normative economics rather than

positive economics (also sometimes known as descriptive economics). In other words,
it is prescriptive rather than descriptive. The main body of economic theory confines
itself to descriptive hypothesis, attempting to generalize about the relations among
different variables without judgment about what is desirable or undesirable. For
instance, the law of demand states that as price increases, demand goes down or vice-
versa but this statement does not tell whether the outcome is good or bad. Managerial
Economics, however, is concerned with what decisions ought to be made and hence
involves value judgments. This has two aspects: first, it tells what aims and objectives
a firm should pursue; and secondly, these having been defined, it tells how best to
achieve these aims in particular situations. Managerial Economics, therefore, has also
been described as 'normative micro-economics of the firm’.

Fifthly, macroeconomics is also useful to Managerial Economics since it

provides an intelligent understanding of the environment in which the business must
operate. This understanding enables a business executive to adjust in the best possible
manner with external forces over which he has no control but which play a crucial
role in the well being of his concern. The important topics are: business cycles,
national income accounting, and economic policies of the government like those
relating to taxation, foreign trade, anti-monopoly measures, labour relations, etc. In
fact, to conduct business without a solid grasp of such essential economic facts of life
as gross domestic product, rates of exchange, balance of trade, inflation and
unemployment would be like trying to sail without proper navigational tools.
Managers and entrepreneurs, as such, now-a-days make it their business to have a
good working knowledge of macro-economics.
SCOPE OF MANAGERIAL ECONOMICS
As regards the scope of Managerial Economics, various authors have
followed no uniform pattern. However, the following aspects (topics) may
be said to generally fall under Managerial Economics:

1. Demand Analyses and Forecasting,

2. Cost Analysis.

3. Productions and Supply Analysis,

4. Pricing Decisions, Policies and Practices,

5. Profit Management, and

6. Capital Management.

These aspects may also be called as the 'subject-matter of Managerial

Economies'.

DEMAND ANALYSIS AND FORECASTSING

Law of Demand

"Higher the price, lowers the demand, and vice versa, other things remaining
the same".

Chief Characteristics

The chief characteristics of the Law of Demand are as follows:

1. Inverse Relationship. The relationship between price and quantity demanded is

inverse. That is, if the price rises demand falls, and if the price falls, the demand goes
up.

2. Price, an independent variable, and demand, a dependent, variable. Under the

Law of Demand, it is the effect of price on demand, which is examined, and not the
effect of demand on price. When demand rises, the prices would rise, and when
demand falls, the price would fall. But the law of demand does not concern with this
Kind of behavior or phenomenon. In other words, in the Law of Demand price is
regarded as an independent variable and demand a dependent variable, mathematical
economists would call it.

3. Other things remain the same. The Law of Demand assumes that other things
remain the same. In other words, there should be no change in the other factors
influencing demand except price. If, however, any one or more of the other factors,
say, income, substitute's price, consumers' tastes and preferences. Advertising outlays,
etc., vary, the demand may rise, in spite of a rise in price, or alternatively, the demand
may fall in spite of a fall in price.4. Reasons underlying the Law of Demand. The
inverse relation between price and demand as stated by the Law of Demand can be
explained in terms of two reasons, viz., (a) Income Effect, and (b) Substitution Effect.

a) Income Effect The fall in the price of a commodity leads to and, therefore, is
equivalent to an increase in the income of the consumer because now he has to spend
less for purchasing the same quantity as before. A part of the money so gained can be
used for purchasing some more units of the commodity. When price rises, the
consumer's income is, in effect, reduced and he has to curtail his expenditure on all
commodities including the commodity whose price has risen.

b) Substitution Effect. When the price of the commodity falls, the consumer tends to
substitute that commodity for other commodities, which have not become relatively
dear. If the price of urad falls, some people in place of other pulses to some extent
will use it. Conversely, when the price of a commodity rises, other commodities will
be used in its place, at least to some extent. Therefore, a fall in the price of a
commodity increases demand and a rise in its price reduces demand.

COST ANALYSIS:-

Cost data for business decisions

For managerial control, costs must be classified according to areas of

executive responsibility and according, to the decree of authority over expenses
delegated to the executive. Once one of the alternative plans is chosen, and
responsibility for carrying it out in an acceptable manner is assigned, expenses must
be reclassified in a manner that will measure how the performance of each executive
compares with some standard budget.

Actual Cost and Opportunity Cost

Actual costs mean the actual expenditure incurred for acquiring or producing a
good or service. These costs are the costs that are generally recorded in the books of
account, for example, actual wages paid, cost of materials purchased, interest paid etc.
These costs are also commonly known as Absolute Costs or Outlay Costs.

Incremental costs (Differential Costs) and Sunk Costs

Incremental cost is the additional cost due to a change in the level or nature of
business activity. The change may take several forms, e.g., addition of a new product
line, changing the channel of distribution, adding a new machine, replacing a machine
by a better machine, expansion into additional markets, etc. Thus, the question of
incremental or differential cost would not arise when a business is to be set up afresh.
It arises only when a change is contemplated in the existing business.

Past Costs and Future Costs

Past costs are actual costs incurred in the past and are generally contained in
the financial accounts. The measurement of past costs is essentially a record-keeping
activity and an essentially passive function insofar as the management is concerned.

Fixed and Variable Costs

Total costs could be divided into two components: fixed costs and variable
costs. Fixed costs remain constant in total regardless of changes in volume up to a
certain level of output. They are not affected by changes in the volume of production.
They will have to be incurred even when output is nil. There is an inverse relationship
between volume and fixed costs per unit. Thus total fixed costs do not change with a
change in volume but vary per unit of volume inversely with volume. If the total
production increases, fixed costs per unit will go down and vice versa.

Joint Costs
 For product costing, it is desirable to distinguish between two broad categories
of common products: joint products and alternative products. When an increase in the
production of one product causes an increase in the output of another product, then
the products and their costs are traditionally defined as joint. For example, when gas
is produced from coal, coke and other products also emerge. The later will have as
joint cost the purchase price of coal. Hence the processing of material automatically
results in two or more distinct products being produced. In contrast, when an increase
in the output of a product is companied by a reduction in other products, the products
may be called alternative. Slag and Steel are joint products, but steel rails and steel
bars are alternative products. When the proportion of the various products is fixed,
separate products costs are indeterminate and there is no point in contemplating their
separation.

Shutdown and Abandonment Costs

Shutdown costs may be defined as those costs which would be incurred in the
event suspension of the plant operation and which would be saved if the operations
were continued. Examples of such costs are the costs of sheltering the plant and
equipment and construction of sheds for storing exposed property. Further, additional
expenses may have to be incurred when operations are restarted, e.g., re-employment
of workers may involve cost of recruitment and training.

Abandonment costs are the costs of retiring altogether a plant from service,
abandonment arises when there is a complete cessation of activities and creates a
problem as to the disposal of assets; for example, the costs involved in the
discontinuance of tram services in Mumbai and Delhi.

These costs become important when management is faced with the alternatives
of either continuing the existing plant or suspending its operations or abandoning it
altogether.

Urgent and postponable Costs

 Those costs which must be incurred in order to continue operations of the firm
re urgent costs; for example, the costs of materials and labour which must be incurred
if production is to take place.

Costs, which can be postponed at least for some time, are known as
postponable costs, e.g., maintenance relating to building and machinery.

Out-of-Pocket and Book Costs

Out-of-pocket costs refer to costs that involve current cash payments to

outsiders. On the other hand, book costs such as depreciation do not require current
cash payments. Book costs can be converted into out-of-pocket costs by selling the
assets and having them on hire. Rent would then replace depreciation and interest.

Escapable and Unavoidable Costs

Escapable costs refer to costs, which can be reduced due to a contraction in the
activities of a business enterprise.

Replacement and Historical Costs

Historical cost means the cost of a plant at a price originally paid for it.
Replacement cost means the price that would have to be paid currently for acquiring
the same plant.

Controllable and Non-controllable Costs

A controllable cost may be defined as one, which is reasonably subject to

regulation, by the executive with whose responsibility that cost is being identified.
Thus a cost, which is uncontrollable at one level of responsibility, may be regarded as
controllable at some other, usually higher level.

Average Cost, Marginal Cost and Total Cost

 Average cost is the total cost divided by the total quantity produced. Marginal
cost is the extra cost of producing one additional unit.

Cost-Output Relationship

The study of cost-output relationship has two aspects:

1. Cost-output relationship in the short run, and

2. Cost-output relationship in the long run.

The short run is a period, which does not permit alterations in the fixed
equipment (machinery, buildings, etc.) and in the size of the organization. As such, if
any increase in output is desired, it is possible within the range permitted by the
existing fixed factors of production.

The long run is a period in which there is sufficient time to alter the equipment
(machinery, buildings, land, etc.) and the size of organization. As such, in the long run
output can be increased without any limits being placed by the fixed factors of
production, as they themselves are capable of being changed.

Production Function and Supply Analysis

The Production Function can be illustrated as in Chart-1. Inputs (the ellipse on

the left are transformed into outputs (the ellipse on the right) via a set of production
processes that constitutes the production function (the rectangle between). Thus, steel
plate and a host of other inputs are combined with labour in various combinations to
produce motorcars; schoolrooms, books, teachers and students are combined to
produce an elusive output called education. Sometimes an output of one productive
process is an input to another (for example, a tyre): such goods are known as
intermediate Outputs.

Production Function
Inputs Outputs
 The production function can also be expressed in the form of a schedule. Table
1 shows two inputs: labour (X), that is, number of men, capital (Y), that is, size of
machine (in terms of horsepower), and the output (Q), that is, the number of tonnes of
iron ore produced with the various combinations of inputs.

Table 1: Production Function

Capitol (Y) — Size of machines (in horse power)
250 1,000 1,500 2,000
Labour (X) 1 2 20 32 26
2 4 48 58 88
(Number of workers)
3 8 88 110 100
4 12 110 120 110
5 32 120 124 120
6 58 124 126 124
7 88 120 128 128
8 100 126 130 130
9 110 126 130 132
10 104 124 130 134

The production function can be stated in the general form of an equation:

Y=f (Xl,X2, etc.)

Where Y, the units of output, is a function of the quantity of two or more inputs with
X1 including units of labour, for example, and X2 units of machinery. Some factor of
production maybe assumed as fixed (i.e., not varying with changes in output); such
factors will not enter the equation. The production function can be estimated by the
method of least squares.

In economic theory, we are concerned with three types of production

functions, viz.,

1. Production function with one variable input,

2. Production function with two variable inputs, and

3. Production functions with all variable inputs.

 Hence. “Managerial Economics as "the integration of economic theory with
business practice for the purpose of facilitating decision-making and forward planning
by management.” is the discipline, which deals with the application of economic
theory to business management. Managerial Economics thus lies on the borderline
between economics and business management and serves as a bridge between the two
disciplines.

METHODS OF RESOURCE PROGNOSTICATION

After completion of various surveys analytical studies of the proposed areas

are done this is defined as Prognostication. It is followed by assessment of the
stratigraphy and other geological data. Reliability of prognostication depends on the
quantity and quality of data and the expertise of the geologist to interpret them. In
order to make a correct estimate, it is desirable to have an idea about the processes of
origin, sedimentation and laws, which control the distribution of oil and gas
accumulation in a particular basin.

The following characteristics should always be borne in mind to distinguish a

hydrocarbon-bearing basin.

• Direct and indirect evidences of presence of oil and gas.

• Favorable tectonics and structure, presence of oil, basement high, etc.
suitable structural/stratigraphic traps.
• Metamorphism should be within the reasonable limits so that the generated
oil/gas may not be destroyed.
• Availability of favorable facies and lithological conditions.
• Existence of suitable hydrogeological conditions.
• Caprock for entrapment.

Surface indication of hydrocarbon is not at all a guarantee that oil/gas will be

present at depth. It is only the drilling of the well that can tell of the presences
or absences of hydrocarbon or its commercial viability.

RESERVE PROGNOSTICATION METHODS

 Quantitative. Qualitative

Qualitative estimation is done first to define areas of different prospectivenes.

With availability of more and definite data.
Quantitative estimation is volumetric analysis of reserve and involves mathematical
methods.
On the basis of qualitative prognostication, the basin or part of basin is divided
into size qualitative zones, as follows:

• High prospective area with proved commercial oil/gas bearing structures.

• High prospective area with non-proved, likely commercial oil/gas bearing
structures.
• Prospective area
• Areas with low prospects
• Areas with some prospects which have yet to be proved
• Nonprospective areas.

RESERVE CATEGORIZATION, ESTIMATION,AND ECONOMIC

FORECASTING:-

Classifications are dynamic and not static. We therefore need to begin the
analysis by reviewing the historical evolution and end by contemplating the possible
future changes. But we always live between the past and the future. Therefore we
need to consider carefully the strength of the new and dominating classification
presented in 2000 by the Society of Petroleum Engineers (SPE; http://www.spe.org),
the World Petroleum Congresses (WPC) and the American Association of Petroleum
Geologists (AAPG). This has now been adapted for application in Norway. A
comparison with the Russian classification is used to illustrate how two systems may
be unified to complement each. Before coming to that point, we will examine the
various needs for classification in Government, industry and finance. The
 internationalisation of finance over the last decades is making it so obvious these days
that a corresponding infrastructure of international financial regulations is required.
Future changes may well come with initiatives in this area.

“Reserves and resource classifications change slowly

to reflect needs”

• How has the historical evolution been?

• What are the current SPE/WPC/AAPG and Norwegian NPD/FUN

classifications?

• What potential improvements does the new classification

facilitate?

• Examine the classification used when quoting reserves in

financial statements.

•History
Examine
of NPD’sa classification
scheme for unifying different classifications: The case
of the Russian and the NPD/FUN classification.

• •1965Conclusions:
- 1991 Simple tables to more advanced spreadsheets
What changes can we expect to see in the future?
– 6 resource classes
– Only reserves used (even for undiscovered prospects), later (1984)
distinguished between Reserves and Resources, Discovered and
NEAR SURFACE
PROFILE
Undiscovered.
– Defines Maturity of petroleum resources
– Fewreserves
Petroleum fields, easy overview/control
and resources classifications are used for
•
different purposes:
1991-1994 Introduces probabilistic data of resources
– Government:
● 6 resource classes, including improved recovery
– Register Minimum (P95), Expected and Maximum (P05)

• 1994-1997
 Manage the country’s petroleum resources
Further development…..
– 7 resource classes, including fields that are closed down and discoveries
● Industry
that are relinquished.
–The maturity of the resources with respect to production are focused
 Manage exploration and production processes
• 2001 New classification system based on SPE/WPC/AAPG.

● Financial management
Petroleum resources are classified to meet the needs of analyses. The needs fall in
three broad classes:

• Petroleum resource management – primarily at government levels.

• Management of the business processes for exploration and production –
primarily at corporate levels.
• Investment management – primarily at the level of owners and lenders
(financiers).

If we are to find one classification which serves the needs of all three classes of
analysis we must understand the way information is used in the different analyses.

A common, and main, goal of government in performing its petroleum resource

management functions is to open acreage for exploration and production, and to
regulate the activities in such a way as to maximize economic recovery of the
country’s petroleum resource base in the long run. This requires a realistic view of the
entire petroleum resource base, of the total activities over time, and of the efficiency
with which petroleum is recovered and produced for sale.
Companies are assigned exclusive exploration and production rights to achieve the
wanted results in practice. Companies need to manage their business processes
accordingly. This is primarily done through the exploration and production decisions
that are taken and executed. Corporations therefore often use a structured pattern of
decisions, and classify their petroleum resources accordingly.
Capital to conduct the activities is managed by owners of corporations and by
banks and other lending institutions. The financiers are concerned that the information
with regard to petroleum resources be related to the value and that this relationship
between resources and value be the same for the different corporations that they may
choose to finance. Analyses that investors make of stocks and securities require
clarity about the high value resources (proved and proved developed reserves). They
tend therefore to de-emphasize, or exclude, low value resources and resources which
cannot easily be quantified, such as exploration and production potentials.
As the needs within these three applications of petroleum classification are
distinctly different, different classifications have been developed for the three
purposes. In addition, countries, companies and security and exchange authorities
have developed their variations of the needed classifications and definitions
independently

SPE/WPC/AAPG reserves definitions and resource classification

DISCOVERED PETROLEUM-INITIALLY-IN-PLACE

PRODUCTION
COMMERCIAL

RESERVES
TOTAL PETROLEUM-INITIALLY-IN-PLACE

PROVED
PROVED plus
PROVED plus PROBABLE
PROBABLE plus
POSSIBLE
SUB-COMMERCIAL

CONTINGENT
RESOURCES
LOW BEST HIGH
PETROLEUM-INITIALLY-IN-PLACE

ESTIMATE ESTIMATE ESTIMATE

UNRECOVERABLE
UNDISCOVERED

PROSPECTIVE
RESOURCES
LOW BEST HIGH
ESTIMATE ESTIMATE ESTIMATE

UNRECOVERABLE

RANGEOFUNCERTAINTY

Not toscale
 Fig.1

The World Petroleum Congresses (WPC) and the Society of Petroleum Engineers
(SPE) published joint reserves definitions in 1997. A Petroleum Resource
Classification issued jointly by SPE, WPC and AAPG in 2000 followed this.

Most importantly, the reserve definitions have firmly established probabilistic

methods as an accepted industry standard.
The Norwegian Petroleum Directorate/Forum for Forecasting and Uncertainty
Evaluation (NPD/FUN) classification

RESOURCE CLASS PROJECT STATUS

CATEGORY
Sold and delivered petroleum C0 Sold and delivered

LOWER RISK
DISCOVERED PETROLEUM-INITIALLY-IN-PLACE

C1 In Production
COMMERCIAL

Approved
RESERVES C2A/F
Development Plan

C3A/F Decided recovery

C4A/F In planning
TOTAL PETROLEUM-INITIALLY-IN-PLACE

CONTINGENT

PROJECT MATURITY
C5A/F Unclarified
SUB-COMMERCIAL

RESOURCES C6 Not very likely

C7A/F Not evaluated

UNRECOVERABLE
PETROLEUM-INITIALLY-IN-PLACE

C8 Prospect
PROSPECTIVE
UNDISCOVERED

HIGHER RISK
RESOURCES
C9
Lead

UNRECOVERABLE

RANGE OF UNCERTAINTY

Fig. 2

The classification has two characteristics that combine to give it a powerful

potential.
• It facilitates the use of probabilistic estimates
• The project status categories relate to recovery efforts, and not only to
petroleum accumulations.
 This facilitates consistency between financial reporting and the reporting of
reserves and resources. It also facilitates valuing opportunities and risks, hidden by
uncertainty. To illustrate, consider the value of flexibility in developing a field:

Unifying the Russian and International

Classifications

SPE/WPC/AAPG NPD/FUN Russian classification

Reserves Resources
Stages of
Resource class Project status category Non
Commercial A B C1 C2 C3 D/1 D1 D2
commercial
Development
Sold and
0 Produced
Sold and delivered petroleum delivered
On Under
1 On production
Discovered petroleum initially in place
Commercial

production development
Under Approved
Reserves 2A/F
development devlopment plan Prepared for
Planned for development
3A/F Decided recovery
development
Total petroleum initially in place

Development
4A/F In Planning
Sub-Commercial

pending
Being explored
Development
Contingent 5A/F Unclarified
on hold
resources
Development
6 Not very likely Conserved
not viable
7A/F Not evaluated

Unrecoverbale

Prospect 8 Prospect
petroleum initially

Prospective Undiscovered
Undiscovered

resources Lead fields

9 Lead
in place

Play

Unrecoverable

Fig. 3

The problem of managing a change in classification is quite different of

course. The first step is to construct a matrix showing the two classifications on
perpendicular axes. Figure.3 shows the Russian classification against the NPD/FUN
classification.

The similarities and differences in the two classifications become quite

apparent. The matrix is in itself an improvement over both classifications, particularly
 when working across the systems. To illustrate, when reporting reserves in the project
status category “on production” according to the NPD/FUN classification, it will be
necessary to assign attributes showing whether it is an A, B or C1 category in the
Russian classification. Likewise, the category C1 in the Russian classification will
need attributes showing whether it has project status category 1, 2A or F, 3A or F, 4A
or F, 5A or F or 6 in the NPD/FUN classification.

The result is a richer classification, but also one that is more complex to
communicate and practice. Some of the complexity could be redundancies that might
be eliminated at the introduction of the matrix. Others may be streamlined through
evolutionary changes that come with practice. The conversion matrix meets the
concern that an existing and operative system is not abandoned before a new one is in
place.

The United Nations Economic Commission for Europe has a special

mandate to look after energy issues in the UN system. Their committee on sustainable
energy has taken an initiative that may facilitate transitions to new systems of
classification, by forming an ad-hoc group on the harmonization of terminology for
energy reserves resources. The group is proposed to be composed of experts from
petroleum, coal and uranium communities and institutions including OPEC, WPC,
The World Energy Council, The Nuclear Energy Agency, The International Atomic
Energy Agency, Council of Mining and Metallurgical Institutions, The Society of
Petroleum Engineers among others. A staring point for discussions is the UN

• Framework Classification that defines resources by their geological description,

Probabilistic forecasting better reflects our understanding and
technical maturity and economic viability.
therefore facilitates better management.

• Needs for resource management/business management and

financial management are likely to require different classifications
also in the future.
Conclusioand possible future developments
• Differences may be reduced by:

– Reporting mean values of reserves as a basis for change

explanations.
– Reporting proved reserves as a supplement.
– Using forward prices for forecasts instead of historical prices.

• The internationalisation of finance requires international standards.

• Classifications must evolve in a continuous way and not change

abruptly. Conversion matrices may facilitate transitions.
ESTIMATION OF RESERVES

• Volumetric method
• Decline curve method
• Material Balance method
• Mathematical simulation

VOLUMETRIC METHOD
Oil Reservoirs

The volumetric method for estimating recoverable reserves consists of

determining the original oil in place (OOIP) and then multiplying it by an estimated
the ‘Recovery Factor’ (Er). OOIP is arrived at by a simple formula involving the bulk
volume of the reservoir (A× h), the porosity (φ ), the initial oil saturation (Swi) and the
oil formation volume factor’ (β o). The bulk volume is determined from the isopach
map of the reservoir. The porosity and oil saturation are determined through the
analysis of reservoir core samples and electrologs of the hydrocarbon bearing horizon.
The β o is determined either in the laboratory through the PVT analysis of reservoir
fluid samples or from the standard correlations which take into accounts the reservoir
pressure, temperature, oil API gravity etc. Thus, OOIP.
N = Ahφ Soi/β oi

The units in the formula have all to be either in standard American units or
metric units. In the standard American units, the bulk volume (A.h) is expressed in
acre-feet and β o in reservoir barrels / stock tank barrel (RB/STB). In this case, the
volume term acre – feet is to be converted into barrels. In the metric system, the bulk
volume is expressed in m3 and β oi in m3/m3. φ and Swi are fractions in both the
systems. N is expressed is S.T.Bs. or m3 in both the systems.
Original-solution gas-in-place, OSGIP, is given by:
Gs = N.Rsi
Where
Gs = OSGIP, scf
N = OOIP, STB
Rsi, = the initial solution gas-oil ratio (GOR) in scf/STBO.
The original-free gas-in-place in the gas cap, if present in the reservoir is given
by:
G = 7758 Ahφ Sgi/β gi

Where
G = original free gas in place, scf
Sgi=initial gas saturation, fraction
β gi= initial gas formation volume factor, RB/scf
h=average thickness, ft (gas interval)
API Correlations
AP1 Correlations for the Er term exist for different types of drive mechanisms
and lithologies of the formations and petrophysical and fluid saturation parameters.
API correlation for recovery efficiency for solution gas drive reservoirs (sand,
sandstones, and carbonate rocks) is given by

ER=41.815 [φ (1- Swi)/Bob]^0.1741-0.1611 * (k/μob) ^0.0979 *(Swi) ^0.3722

* (pb/pa)^0.1741
Where
ER = recovery efficiency, % OOIP at bubble point
φ = porosity, fraction of bulk volume
Swi = interstitial water saturation, fraction of pore space
Bob = oil formation volume factor at bubble point, RB/STB
k = absolute permeability, Darcy
μob = viscosity of oil at bubble point, cp
pb = bubble point pressure, psia
pa = abandonment pressure, psia

Recovery efficiency for water drives reservoirs (sands and sandstones):

ER=54.898 [φ (1- Swi)/ Boi] ^0.0422 * (k μwi /μoi) ^0.0770 *(Swi) ^-0.1903 * (pi/pa) ^-
0.2159
Where
ER= recovery efficiency, % OOIP
Boi = initial oil formation volume factor, RB/STB
μwi = initial water viscosity, cp
μoi = initial oil viscosity, cp
pi = initial reservoir pressure, psia

DECLINE – CURVE METHOD

Decline curve method is based on the well recognized concept that the producing
rate is bound to decline with time in a depleting system. Since the graphical
representation of production data eventually shows production curves decrease with
time, the curves are known as “decline curves”.
 When sufficient production data are available and production is declining, the
past production curves of individual wells, lease, or field can be extended to indicate
future performance. The very important assumption in using decline curves is that all
factors that influenced the curves in the past remain effective throughout the
producing life. Many factors influence production rates and consequently
decline curves. These are proration, changes in production methods, workovers, well
treatments, pipelines disruptions, and weather and market conditions. Therefore, care
must be taken in extrapolating the production curves in the future. When the shape of
a decline curves changes, the cause should be determined, and its effect upon the
reserves evaluated.
When sufficient production data are available and the production is declining
with time, the past such information of an individual well or the field as a whole can
be extrapolated to indicate future performance, upto the level of acceptable economic
rate.
The commonly used types of decline curves for oil reservoirs are

1. Log of production rate Vs time

2. Production rate Vs cumulative production.
3. Log of water-cut or oil-cut Vs cumulative production.
4. Change in the OWC or GOC Vs cumulative production.
5. Log of cumulative gas production Vs cumulative oil production.

A very important assumption in using the decline curves is that all factors that
influenced the curve in the past remain effective throughout the life of the field, which
is practically not true. Therefore care must be taken in extrapolating the curves for
future performance. When there is a change in the shape of the curve, the cause must
be looked into and its effect on the reserves evaluated.
The type 1 & 2 plots are straight lines indicating a ‘constant decline rate’ or
‘exponential decline curves’. These are most commonly used. In case of ‘harmonic’
or ‘hyperbolic’ decline rate, the curves exhibit curvature. Unrestricted early
production from a well or field shows hyperbolic decline rate. However, exponential
decline rate will be reached at a later stage of production. Type 3 curves are
employed when economic production rate is dictated by the cost of water treatment
and disposal. Type 4 curves are used for natural water or gas cap drive reservoirs.
Type 5 curves are used when the oil reserves are known and the gas reserves are to be
estimated or vice versa.

The basic mathematical expression for the rate of decline, D, is expressed as,
D = (dq/dt) q = Kqn

Where, q = production rate, barrels per day, month or year

t = time, day, month or year
k = constant
n = exponent
The decline rate D, in the above equation can be constant or variable with time
yielding three basic types of production decline, i.e., exponential, hyperbolic and
harmonic.

a. Exponential or Constant Decline

D = (dq/dt) q = K= -ln (qi/qt)/t

When n=0, K= constant

qi = initial production rate
qt = production rate at time t
The rate-time and rate-cumulative relationships are given by
qt = qi * e-Dt
Qt = qi - qt / D
Where:
Qt = cumulative production at time t
A familiar rate constant for exponential decline is as follows:
D’ = Δq/ qi
Where
Δq is the rate change in the first year.
In this case, the relationship between D and D’ is given below:
D= - ln (1- Δq/ qi) = - ln (1-D’)

b. Hyperbolic Decline

D = (dq/dt) q = Kqn (0 < n < 1)

 This is the same equation as the general decline rate equation except for the
constraint on n.
For initial condition
K = Di/ qin
The rate-time and rate-cumulative relationships are given by:
qt = qi(1+n Dit)^-1/n
Qt = qin(qi1-n – qt1-n)/(1-n) Di
Where
Di = initial decline rate

c. Harmonic Decline

D = - (dq/dt) q = Kq
When n=1
For initial condition
K = Di/ qi
The rate-time and rate-cumulative relationships are given by:
qt = qi / (1+Dit)
Qt = qi /Di ln qi /qt
Both exponential and harmonic declines are special cases of the hyperbolic decline.
MATERIAL BALANCE METHOD

The material balance method is based on the fundamental principle of the law of
conservation of mass and is used to estimate the original hydrocarbon in place and the
ultimate primary recovery. The basic assumption made in this technique are:
• Homogeneous tank model
• Fluid production and injection occur at single production and single injection
points.
• There is no direction to the fluid flow.
•
However, the reservoirs are not homogeneous; production and injection wells are
areally distributed and are activated at different times and fluid flows in definite
directions. Inspite of these deviations from the basic assumptions, the material
balance method is the most widely used, because of its reasonably acceptable results.
The material balance equations can be used to estimate the OOIP by history matching
the past performance and to predict the future performance.
The general material balance equations for oil reservoirs contain three unknowns :
original oil in place, gas-cap size and cumulative natural water influx. The equations
include production and injection data, rock and fluid properties that depend upon the
reservoir pressureThe basis of general material balance equation is :

Underground withdrawal = Expansion of oil

+ Original dissolved gas
+ Expansion of gas caps
+ Reduction in hydrocarbon pore volume due to
connate water expansion and decrease in the pre
volume.

+ Natural water influx.

The material balance as an equation of straight line is given by:
F = N (Eo + mEg + Efw) + We
Where F = underground withdrawal, RB
N = Original oil in place, STB
Eo = Expansion of oil and original gas in solution, RB/STB
Eg = Expansion of gas cap gas, RB/STB.
m = Initial gas-cap volume fraction, RB/RB, (gas cap/oil zone)
Efw = expansion of the connate water and reduction in the pore volume,
RB/STB.
We = cumulative natural water influx

MATHEMATICAL SIMULATION

Numerical reservoir simulators play a very important role to study the

reservoir performance and to decide upon the methods for enhancing the ultimate
recovery of hydrocarbons from the reservoir. Numerical simulation is still based
upon material balance principles, taking into account reservoir heterogeneity and
direction of fluid flow. Unlike the classical material balance approach, a reservoir
simulator takes into account, the locations of the production and injection wells and
their operating conditions. The wells can be turned on and off at desired times with
specified down-hole completion. The wells’ rates and / or the bottom hole pressures
can be set as desired.

The reservoir is divided into many tanks or cells to take into account for the
heterogeneity. Computations using material balance and fluid flow equations are
carried out for oil, gas and water phases for each cell at discrete time steps, starting
with the initial time.Different types of simulators are devised for different types of
applications. Their broad features and their use for specific applications are briefly
indicated below:

• Black-oil models are most frequently used to simulate isothermal, simultaneous

flow of oil, gas and water due to viscous, gravitational and capillary forces, Black
oil is a term used to signify that the hydrocarbon phase is considered as a single
liquid and gas and not by chemical composition. The phase composition is
constant even though the gas solubility, in oil and water is taken into account.

• Compositional simulators account for variation of phase composition with

pressure in addition to flow of the phases. They are used for performance studies
of volatile oil and gas condensate reservoirs.

• Thermal simulators account for both fluid flow and heat transport and chemical
reaction. They are used to simulate steam flood and in-situ combustion
performances.

• Chemical simulators account for fluid flow and mass transport due to dispersion,
absorption, partitioning and complex phase behavior observed in chemical EOR
process like surfactant / polymer/caustic flooding etc.

EFFECT OF OPERATING CONDITIONS

Operating conditions are subject to change caused by changes in economic
conditions, unforeseen production problems, new production practices or methods,
and the operator’s financial position. As with economic conditions, operating
conditions to be expected at the time of abandonment are speculative. Thus, current
operating conditions are used in estimating proved reserves. In considering the effect
of operating conditions, a distinction must be made between processes and techniques
that would normally be applied by a prudent operator in producing his oil and gas, and
initiation of changes in operating conditions that would require substantial new
investment.

Compression – Compression facilities are normally installed when the productive

capacity or deliverability of a natural gas reservoir or its individual wells declines. In
other cases compression is used in producing shallow, low–pressure reservoirs or
reservoirs in which the pressure has declined to a level too low for the gas to flow into
a higher pressure pipeline.

The application of compression increases the pressure and, when economical,

is used to make production into the higher pressure pipeline possible. Compression
facilities normally require a significant investment and result in a change in operating
conditions. It increases the proved reserves of a reservoir, and reasonably accurate
estimates of the increase can be made.

Well stimulation – Procedures that increase productive capacity (workovers, such as

acidizing or fracturing, and other types of production practices) are routine field
operations. The procedures accelerate the rate of production from the reservoir, or
extend its life, and they have only small effect on proved reserves. Reasonable
estimates of their effectiveness can be made.

Improved recovery techniques – These techniques involve the injection of a fluid or

fluids into a reservoir to augment natural reservoir energy. Because the response of a
given reservoir to the application of an improved recovery technique cannot be
accurately predicted, crude oil production that may ultimately result from the
application of these techniques is classified as “indicated additional reserves of crude
oil” rather than as proved reserves until response of the reservoir to the technique has
been demonstrated. In addition, improved recovery methods are not applicable to all
crude oil reservoirs. Initiation of improved recovery techniques may require
significant investment.

Infill drilling – Infill drilling (drilling of additional wells within a field/reservoir) may
result in a higher recovery factor, and, therefore, be economically justified.
Predictions of whether infill drilling will be justified under current economic
conditions are generally based on the expected production behavior of the infill wells.
VALIDATION OF RESERVES ESTIMATES

A practical method of validating and confirming that reserves estimates meet

the definitions and guidelines is through periodic reserves reconciliation of both entity
and aggregate estimates. The tests described below should be applied to the same
entities or groups of entities over time, excluding revisions due to differing economic
assumptions:
Revisions to proved reserves estimates should generally be positive as new
information becomes available.
Revisions to proved + probable reserves estimates should generally be neutral
as new information becomes available.
Revisions to proved + probable + possible estimates should generally be
negative as new information becomes available.
These tests can be used to monitor whether procedures and practices employed are
achieving results consistent with certainty criteria contained in Definitions of
Reserves. In the event that the above tests are not satisfied on a consistent basis,
appropriate adjustments should be made to evaluation procedures and practices.
MATERIAL BALANCE METHODS

Material balance methods of reserves estimation involve the analysis of

pressure behavior as reservoir fluids are withdrawn, and generally result in more
reliable reserves estimates than volumetric estimates. Reserves may be based on
material balance calculations when sufficient production and pressure data are
available. Confident application of material balance methods requires knowledge of
rock and fluid properties, aquifer characteristics, and accurate average reservoir
pressures. In complex situations, such as those involving water influxes, multi-phase
behavior, multi-layered, or low permeability reservoirs, material balance estimates
alone may provide erroneous results. Computer reservoir modeling can be considered
a sophisticated form of material balance analysis. While modeling can be a reliable
predictor of reservoir behavior, the input rock properties, reservoir geometry, and
fluid properties are critic al. Evaluators must be aware of the limitations of predictive
models when using these results for reserves estimation. The portion of reserves
estimated as proved, probable, or possible should reflect the quantity and quality of
the available data and the confidence in the associated estimate.
PRODUCTION DECLINE METHODS
Production decline analysis methods of reserves estimation involve the
analysis of production behavior as reservoir fluids are withdrawn. Confident
application of decline analysis methods requires a sufficient period of stable operating
conditions after the wells in a reservoir have established drainage areas. In estimating
reserves, evaluators must take into consideration factors affecting production decline
behavior, such as reservoir rock and fluid properties, transient versus stabilized flow,
changes in operating conditions (both past and future), and depletion mechanism.
Reserves may be assigned based on decline analysis when sufficient production data
are available. The decline relationship used in projecting production should be
supported by all available data.

MATHEMATICAL SIMULATION

Numerical reservoir simulators play a very important role to study the

reservoir performance and to decide upon the methods for enhancing the ultimate
recovery of hydrocarbons from the reservoir. Numerical simulation is still based
upon material balance principles, taking into account reservoir heterogeneity and
direction of fluid flow. Unlike the classical material balance approach, a reservoir
simulator takes into account, the locations of the production and injection wells and
their operating conditions. The wells can be turned on and off at desired times with
specified down-hole completion. The wells’ rates and / or the bottom hole pressures
can be set as desired.

Reserve estimation techniques are as follows:

 Volumetric method- Applies to crude oil and natural gas reservoirs.
Based on raw engineering and geologic data.
 Material Balance- Applies to crude oil and natural gas reservoirs. Is
used in estimating reserves. Usually of more value in predicting
reserves, and reservoir performance.
 Pressure Decline- Applies to non associated and associated gas
reservoirs. The method is a special case of material balance equation in
the absence of water influx.
  Production Decline- Applies to crude oil and natural gas reservoirs
during production decline.
 Reservoir Simulation- Applies to crude oil and natural gas reservoirs.
Is used in estimating reserves. Usually of more value in predicting
reservoir performance. Accuracy increases when matched with past
pressure and production data.
 Nominal- Applied to crude oil and natural gas reservoirs. Based on rule
of thumb or analogy with another reservoir or reservoirs believed to be
similar; least accurate of methods used.

TECHNOECONOMIC STUDIES: SIMULATION TECHNIQUES

Integrated system analyses, techno economic analyses, and other analysis tools
are essential to our research and development efforts. They provide an understanding
of the economic, technical, and even global impacts of renewable technologies. These
analyses also provide direction, focus, and support to the development and
commercialization of oil industry.

Many methods have been used in analysing the economic aspects of

investments. probably no one method is entirely suitable for the innumerable
variations in investment situations. Element of risk is another factor which is an
important aspect of investment selection . However the element of risk cannot be
included with other economic aspects of the problem, dose not preclude a through
analysis and discussion of the various element of risk involved in the particular
problem under study. Several methods of comparing investment possibilities have
been evolved which have particular merit in oil and gas operation

Geo technical estimates:

Part of the determination of the resource assessment and scientific risk

components of a complete exploration risk analysis is predicted on the ability to
provide technical estimates on

(!) Dimensional aspects of a potential hydrocarbon target, such as thickness, area,

volume, depth, tilt, closure.
(2) Reservoir characteristics such as porosity, permeability, gas to oil ratio,
hydrocarbon recovery efficiency.

(3) Geochemical factors such as source rock richness and depth, maturity, total
organic carbon (TOC) and kerogen types.

(4)Migration factors of hydrocarbons to the potential reservoir, such as transmission

effectiveness (migration loss), dispersal.

(5) Trap integrity with time, such as leakage, recharge, flushing, tilting.

(6) The relative and absolute timing of hydrocarbon migration versus structural and
stratigraphic dynamic events both in the reservoir and in the migration routes.

(7) Other factors such as biodegradation and percent inert gases.

Geotechnical estimates also play a role in the engineering design phase

because estimates of depth to the potential reservoir, of the stratigraphic sequences
present, and of over pressure all indicate the likely drilling conditions to be
encountered, while reservoir area estimates provide an idea of the acreage that needs
to be developed, and reservoir characterization estimates are used to yield an
indication of the completion conditions.

Thus pre-project engineering design costs are also influence by the

quantitative estimates of conditions anticipated to be encountered while drilling from
the geological concept.

Enhanced Recovery Techniques

After a well has used up the reservoir's natural drives and gas lift or pumps
have recovered all the hydrocarbons possible, statistics show that 25 to 95% of the
original oil in the reservoir may still be there. This amount of oil can be worth
recovering if prices are high enough. The major methods of improved oil recovery
are water flooding, gas injection, chemical flooding, and thermal recovery. These
techniques are used when production from the well starts to decrease.
 Water flooding is a technique where water is injected into the formation using
wells that have ceased production. The injected water enters the reservoir and
displaces some of the remaining oil toward producing wells in the same reservoir. The
producing wells then pump up the oil and water. Several injection wells surround each
producing well. Water flooding is the least expensive and most widely used secondary
recovery method.

Production can also be increased by injecting gas, such as natural gas or

nitrogen, into the reservoir. The injected gas expands to force additional volumes of
oil to the surface.

Chemical flooding uses special chemicals in water to push oil out of the
formation. These chemicals act as surfactants that cause the oil and water to mix and
break the oil into tiny droplets that can be more easily moved through the reservoir to
the well.

Thermal recovery is used when the oil is so viscous, or thick, that it cannot flow
through the reservoir and into a well. When the oil is heated, its viscosity is decreased
and the flow increases. Recovery techniques that use heat are called thermal processes
or thermal recovery.

Steam Drive or steam injection involves generating steam on the surface and
forcing this steam down injection wells and into the reservoir. When the steam enters
the reservoir, it heats up the oil and reduces its viscosity. The heat from the steam
also causes hydrocarbons to form gases, which also increases flow. The gases and
steam provide additional gas drive and the hot water also moves the thinned oil to
production wells.

Another way to use heat in a reservoir is fire flooding, or in situ (in-place)

combustion. In fire flooding, the crew ignites a fire in place in the reservoir. They
inject compressed air down an injection well and into the reservoir. A special heater
in the well starts a fire. As the fire burns, it begins moving
through the reservoir toward production wells. Heat from the fire thins out the oil
around it,
 Causes gas to vaporize from it, and changes water in the reservoir to steam.
Steam, hot water, and gas all act to drive oil in front of the fire to production wells.

Economic Estimates:

In addition to the engineering design cost, estimates of several other major

costs have to be evaluated:

The cost to acquire a lease

The cost of inflation

The cost of unanticipated events (stuck drill string)

Cost of capital

It consists of direct costs and indirect costs.

Direct costs:

1. Rig cost.
2. Drilling cost.
3. Purchased equipment installation.
4. Piping.
5. Electrical systems.
6. Service facilities like steam, water, and power.

Indirect costs:

1. Engineering and supervision It includes engineering costs –

administrative, process etc.
2. Legal expenses: Identification of applicable federal, state and local
regulations Acquisition of Regulatory approval.
3. Construction expenses: Construction, operation and maintenance of
temporary facilities like offices, roads, medical etc.
 4. Contractor’s fee: It varies for different situations.
5. Contingencies: Because of unexpected events such as storms, floods,
transportation accidents, strikes, price changes it will increase the cost
of the project.

Manufacturing costs:

All expenses are directly connected to manufacturing operation. These

expenses are divided into three classifications.

Variable production costs: This type of costs include expenditure for raw
materials including transportation, direct operating labor, supervisory,
maintenance and repairs.

Fixed charges: Fixed charges expenses practically independent of production

rate. Expenditures for depreciation, property taxes, insurance, financing (loan
interest) etc.

Depreciation: It is a charge to the revenue resulting from an investment in real

property. It includes costs of equipment, buildings etc.

Plant over head costs: It includes hospital and medical services, special
employee benefits, R&D.

Objectives of Economic Analysis:

• Apply economic and risk management evaluation tools for the oil & gas
project proposals.
• Identify and quantify key uncertainties during field development and full life
cycle economics.
• Calculate the economic and financial viability of expenditure proposals
projects under risk conditions.
• Develop a structured approach to measuring, managing and combating
commercial risk.
• Assess the ranking of alternative projects.
 • Prepare convincing project proposals in a way that will win management,
partner and government approval.
• Improve project and business outcomes.
Key Points

• identifying project cash flows and sources of information

• Project payback
• Net present value (NPV)
• Internal rate of return (IRR) and the cost of capital
• Profitability index (PI)
• Project ranking – how to choose the best alternative
• How to optimize expenditure
• How to deal with inflation and with exchange rates
• Taking account of taxation
• Accounting measures vs. economic measures
• understanding other financial criteria for decision making
• Balancing short-term vs. long-term business objectives
Economics, risk & decisions - decision points are risk points

• Decision points for oil fields and gas fields

• Risk & probability definitions and concepts
• Risk identification, measurement & management
• Forecasting as risk management
• Assumptions, sensitivities & risk premium
• Exploration & appraisal decisions, uncertainty, risk and exposure Monte Carlo
Simulation

• Economic models & spreadsheet design

• Development decisions
• Work scope definition and options
• Decommissioning economics & risks
• Cost estimating and contingencies
• Financing options
• Construction contracts
 • Further development decisions & economic cut off
• preparing convincing project proposals
• Post project appraisal

Capital budgeting:

Capital budgeting is the process of making investments decisions in long-term

assets or courses of action. It is the planning of expenditure and the benefit, which
spread over a number of years.
Techniques:

1) Pay back period method.

2) Average rate of return or Accounting rate of return
3) Net present value method
4) Internal rate of return method
5)Profitability index method
Payback period:

It is the simplest method evaluating investment proposals. Payback period

represents the number of years required to recover the original investment. The pay
back period is also called payout or payoff period. This period is calculated by
dividing the cost of the project by the annual earnings after tax but before
depreciation.

Original cost of the project

Payback period = __________________________
Annual cash inflow

Net present value method (NPV):

 The net present value (NPV) takes into consideration the time value of money.
Net present value is the difference between the present value of cash inflows of a
project and initial cost of the project.

NPV = Present value of cash inflows - Investment

Cash inflow
Present value = ____________
(1 + r)n

r = discounting rate

n = year

The Internal Rate of Return (IRR):

Is a capital budgeting method used by firms to decide whether they should
make long-term investments.
As an investment decision tool, the calculated IRR should not be used to rate
mutually exclusive projects, but only to decide whether a single project is worth
investing in. In cases where one project has a higher initial investment than a second
mutually exclusive project, the first project may have a lower IRR (expected return),
but a higher NPV (increase in shareholders' wealth) and should thus be accepted over
the second project. A method called marginal IRR can be used to
adapt the IRR methodology to this case.
P1 -Q
IRR = _____________ * D
L + P1 – P2

L = lower discounting rate

P1 = present value of earnings at lower rate

P2 = Present value of earnings at higher rate

Q = Actual investment

D=difference in rate of return

POLITICAL CONTRACTS

Fortunately and unlike the marketing and pricing of petroleum products, there
is no controversy over the policy towards the exploration and production of
hydrocarbons in India. Successive governments of all political complexions have
endorsed the importance of engaging the private sector and in allowing the market to
determine the commercial and fiscal terms. All have accepted that risk capital
conjoined with “leading edge” technology offers the best chance of harnessing our
indigenous oil and gas resources. The challenge has been to secure both in the face of
the increasing availability of exploration opportunities worldwide

DISCUSSION AND CONCLUSION

Petroleum is basically a strategic mineral. In order to carry out the

exploration in a new area, the mining lease for the area required has to be obtained.
This job is done by the exploration company which carries out the exploration in that
area. After the mining lease is obtained, the exploration activity in the area
commences.

Before undertaking the task of petroleum exploration in any area, geological

and geophysical surveys are done to find out the type of the rocks present,
environment in which the have been deposited, thickness of the sediments in the
particular area that could be expected in the sub-surface, occurrence of suitable traps
and presence of oil gas seepages. If some positive results are obtained, then that area
is recommended for exploration for oil and gas. As is known, the oil well drilling is a
very costly gamble and unless and until some positive indications are present, the
particular area cannot be taken up for drilling. Even if the majority of the factors
 which are responsible for the generation and the accumulation of the petroleum being
present, but if the formation of the trap takes place after the migration of the
hydrocarbons, that structure, all though may be very good, can be barren. This could
be known only after the drilling in the area takes place. The methods employed for
oil finding and surveys under taken are, direct indications, geological, geophysical,
geochemical methods

REFERENCES

ONGC Academy Sponsored Training Programme Course Material on “Prospecting for

Unconventional Reservoirs”, Organized by Delta Studies

Institute, Andhra University, Visakhapatnam. Oct. 30 – Nov. 3, 2006.

A. K. Sethi, A. V. Sathe and M. V. Ramana, (2004) Potential Natural Gas Hydrates

Resources in Indian Offshore areas. Amer. Asso. Petro. Geol, Hedberg Conference
“Gas Hydrates: Energy Resource Potential and Associated Geologic Hazards”
Vancouver, BC, Canada. Proc. AAPG, Sept, 2004. 12-16, 1-6.

Sawyer, W.K., Zuber, M.D., Kuuskraa and Horner, D.M., (1987), Using
reservoir simulation and field data to define mechanisms controlling coalbed
methane production, Proceedings, Coalbed Methane Symposium, Tuscaloosa,
Australia, pp.295-307.

www.petrostrategies.org/Learning%20Center/Production.htm - 49k -and lecture note of

M.Tech (PE) by V.R.Rao