CHAPTER 1: INTRODUCTION AND BACKGROUND TO THE OIL AND GAS INDUSTRY 4
In this section, we broadly discuss the following background concepts to the oil and gas industry: 1.1 Introduction to Oil and Gas hydrocarbon system elements and the formation of oil and gas; exploration, development and production activities including the types of drilling shale gas basics 1.2 Sector organisation 1.3 Market and Pricing 1.4 Oil and Gas in Africa History and overview Future developments
CHAPTER 2: OIL AND GAS PROCESS AND KEY CONCEPTS 3
CHAPTER 3: LEGAL FRAMEWORK 3
MARKET AND PRICING
Production Profile of an Oilfield
The oil production rate on a typical oilfield begins with the drilling of the discovery well, followed by an appraisal well. Thereafter additional costs will be incurred with the need to replace the wells and to develop the wells. Once the first oil is extracted, the production rate ramps up as additional wells are developed at the same time. The rate will then eventually plateau as fewer wells are added. Then as time progresses there will be a reduction in the underground pressure, and the oilfield will reach the onset of decline and begin to experience decreasing production.
In order to re-invigorate the oilfield there are certain secondary or tertiary production techniques that companies make use of. The purpose of secondary production techniques is to maintain reservoir pressure and to displace hydrocarbons toward the surface. The most common secondary production technique is known as waterflooding, where water is injected into the production zone of the oilfield to push oil from the reservoir effectively reinvigorating the pressure. Additionally, the oilfield may be flooded with carbon dioxide.
Even with the reinvigoration, the wells will get to the stage when production levels hit the economic limits, where the actual operating costs of the oilfield become higher than the revenues generated from the field, at which time it is most likely that the filed will go into abandonment.
When an oilfield can no longer produce a sufficient quantity of commercially recoverable reserves, it may be abandoned. On reaching the stage of abandonment, the owner/licencee will be required to prepare an abandonment programme for regulatory approval and pay the cost of decommissioning. The purpose of abandonment is to isolate the hydrocarbon bearing formation in order to protect the underground resources, prevent potential contamination of water sources and prevention of surface leakage. This is ultimately with the aim of restoring the natural integrity of the earth. If a well is not properly abandoned, it may provide pathways for hydrocarbons or other fluids to migrate up the well r to the surface. Environmental considerations are paramount in the decommissioning of an oilfield.
Oil and Gas Prices
Historically, the price of gas was directly linked to the oil price. However in some countries where there is no oil the gas price is linked to other factors such as coal.
Ultimately, the price of oil is determined by the global supply and demand. The demand for oil depends on the demand for the different products that are produced using oil. As a product, crude oil is not particularly usable and first needs to be refined into useful products, such as gasoline, diesel, jet fuel and ethanol. The different types of crude products will give rise to a different product slate. Light crudes provide higher value products than heavy crudes with the same degree of refining.
The effective product price is determined through the cost of refinement and the demand for the type of product that is produced. In reality the price of oil is actually set in the oil futures market which is based on the market sentiment of the above factors.
The purpose of reserve reporting is to assist the users of an oil and gas company’s financial statements to determine the overall financial position of the company. There are various different rules applicable to the reporting, which are dependent on where a public company is listed, technical rules as to how much estimated oil is in place that the company can declare and on the nature of the company’s rights in the relevant field.
It measures an oil and gas company’s reportable reserves in terms of proved, probable, and possible of their current assets. The longevity and earnings sustainability of those existing assets are important factors to understand the strength of the company in relation to future earnings.
As oil and gas assets are produced through reserves that are constantly depleting, a company must update its reserve report annually to take the depletion rate into account. Reserve reporting exposes the tactics and financial confidence of the company and its future. Determining future capital budgets, cash flow, and investment choices are all based on the confidence it has in its current oil and gas assets.
Reserve reporting must follow strict guidelines and can be very subjective. Both the United States Securities Exchange Commission (SEC) and the Financial Accounting Standards Board provide rules and definitions that companies must adhere to in quantifying their oil and gas reserves. Many large exploration and production (E&P) companies have comprehensive SEC-compliant internal policies and committees that oversee the purpose and reporting of proved reserves. A team of geologists, reservoir engineers, and senior management along with third-party petroleum engineering consulting firms annually review the business assets to follow the SEC guidelines.