Petroleum Department Fourth Stage Risk Analysis

Ass. Lect. Waseem Ali

Risk Analysis

The economic structure of the petroleum industry differs strongly from other industries due to
great risks and uncertainty associated with oil and gas projects, coupled with dangerously
volatile price levels.

In addition, the number of uncertainties in the data utilized in decision making to invest in
petroleum projects is very high, and therefore strongly affects the decision making processes.

The petroleum companies generally make the decision for a certain petroleum project on the
base of economics models. And so, to improve the decision making process and to be able to
face modern challenges, it is imperative to develop a robust solution of the petroleum
economics model and an assessment of the associated risks.

Full Making the decision to invest in petroleum exploration and production projects is
always a very complicated endeavour.
These projects are impacted by many high risk factors associated with the petroleum
industry, such as relatively high initial investment requirements, long term investment
horizons (projects may take up to 20 years or more) and negative cash flow during the
first few years, sometimes also during the last years of the project life.

These factors, coupled with dangerously volatile price levels, makes the number of
uncertainties in the data utilized in decision making to invest in petroleum projects very high,
and this therefore weighs heavily on the minds of decision makers.

Most petroleum companies make the decision to invest in a certain petroleum project based
on economics models, which are constructed as spreadsheets prepared by internal economists
in the company or by external experts based on data available from different sources (such as
petroleum engineers, geologists etc.).

As a result, each petroleum company has developed its own economics model. These models
are characterized by unclear definitions of input variables and the way they are related to the
output parameters.
Petroleum Department Fourth Stage Risk Analysis
Ass. Lect. Waseem Ali

Life cycle of petroleum

Petroleum Department Fourth Stage Risk Analysis
Ass. Lect. Waseem Ali

The first phase of the petroleum project is the licensing phase. Here, the petroleum company
receives legal rights from the host government to explore petroleum in a specific area.

The second phase is the exploration phase, which aims to proof the existence of petroleum
within the granted exploration license. In order to achieve this, several geological and
geophysical studies are made and the collected data are analyzed and interpreted . If the
likelihood of a sufficient quantity of petroleum is acceptable, one or more exploration wells
will be drilled. If the wells are unsuccessful, the project will be stopped.

The third stage is in case of successful exploration efforts, the appraisal phase begins with
more geological studies and sometimes additional wells (appraisal wells), to be drilled in order
to enhance the level of confidence in the volume of petroleum and the profitability of the
project. If the discovered quantity of petroleum is economic, the decision will be made to
proceed with the next phase.

The fourth phase is the development phase. Here, a field development plan is formulated and
evidence on the technical and economic feasibility of the project is provided.

On application by the petroleum company the exploration license will be converted to a

production license by the government. Then the development plan will be realized, the
production wells will be drilled and the production facilities implemented. The development
phase represents the phase of highest cost during the entire project life.

The fifth stage is the production phase where wells are completed and the facilities are
commissioned, the fifth phase starts, the production phase. The production phas e itself passes
through three sub-stages as shown in the following figure.

Typical petroleum production curve

Petroleum Department Fourth Stage Risk Analysis
Ass. Lect. Waseem Ali

From the previous figure, we can recognize the following stage

1-Build up stage: During this stage the wells are progressively brought on stream,
which means that the production rises at a relatively constant rate until it reaches an
anticipated level of production, when all wells are on stream.

2-Plateau stage: During this stage the production rate remains steady. The duration of
the plateau phase may be difficult to estimate, especially for large fields with long
production periods.

3-Decline stage: During this stage the production rate declines. This stage lasts longer than
other stages of production.

The following figure shows to the collection of process equipment used to separate, treat, store,
and transfer crude oil, condensate, natural gas, and produced water.

The sixth phase, the final phase in the petroleum project life, is the abandonment phase. This
phase starts at the point when the revenue of the project no longer covers operating costs .

However, preparations for the abandonment phase usually start earlier than the actual year of
abandonnent.