Including Oil Price Uncertainty in Development Option Selection Taking the Project Portfolio into Account
- Dominik Steineder (OMV E&P) | Torsten Clemens (OMV E&P)
- Document ID
- Society of Petroleum Engineers
- SPE Europec featured at 81st EAGE Conference and Exhibition, 3-6 June, London, England, UK
- Publication Date
- Document Type
- Conference Paper
- 2019. Society of Petroleum Engineers
- Development Option, Probability of Economic Success Hurdle, Oil Price, Value of Information, Project Maturation
- 19 in the last 30 days
- 62 since 2007
- Show more detail
- View rights & permissions
|SPE Member Price:||USD 9.50|
|SPE Non-Member Price:||USD 28.00|
Oil price forecasting has been shown to be challenging if not impossible for the long-term. However, the oil price has a major impact on Exploration and Production projects.
Historical Project Realized Oil Price (PROP) can be calculated for example projects by summing up the total project revenue using the actual oil prices and dividing through the total amount of oil produced. For different starting dates of example projects, the PROP changes. Determining the PROP for different starting times, a Cumulative Distribution Function (CDF) can be derived. Adjusting this CDF for expected "half cycle breakeven costs" for the low limit and demand considerations for the high case leads to a PROP range that can be used for future project evaluation.
Including PROP ranges into project evaluation allows for the selection of the most attractive development option, Value of Information analysis and project Probability of Economic Success (PES) calculation including oil price uncertainty.
Furthermore, using PROP ranges rather than oil price scenarios enables a distinction between short-term budget planning and long-term project development. For budget planning, a scenario approach is suggested while for long-term planning PROP ranges should be used. Applying long-term planning on PROP ranges leads to less fluctuation in staff planning and small annual adjustments in PROP range forecasting. Also, using PROP ranges results in increasing PES project hurdles at low oil prices and lower PES hurdles at high oil prices. Hence, at low oil prices the risk averseness of the company is increased. Another effect of using PROP ranges is that at high oil prices robustness of projects to low oil prices is included in the assessment.
To investigate the effect of PROP ranges on portfolio PES hurdles and project PES hurdles, a simplified linear-fit-model was developed. The results of the model showed that the project PES hurdles in a Value at Risk assessment can be determined applying the linear-fit-model to quantify the oil price dependency. The required individual project PES hurdles can be adjusted using the linear-fit-model to account for oil price uncertainty.
|File Size||2 MB||Number of Pages||25|
Camargo de Abreu, C. A.; Costa Lima, G.A. and S.B. Suslick. 2006. The Timing of Investment in Deepwater Heavy-Oil Opportunities With Uncertainty in Oil Price and Production Technology. Paper SPE 102891 presented at the 2006 SPE Annual Technical Conference and Exhibition. San Antonio. Texas. USA. 24-27 September 2006.
Jentsch, W. A.; Merryman, A. A.; Littell, G. S. and H. Groppe. 2002. Toto, We're Not in West Texas Anymore; A Challenging Examination of the Historical Global Oil Production Capacity, Demand, Price and the Changing Elasticies. Paper SPE 77735 presented at the SPE Annual Technical Conference and Exhibition. San Antonio. USA. 29 September -2 October 2002.
Norwegian Petroleum Directorate (NPD). 2008. Factpage. http://factpages.npd.no/factpages?
Norwegian Petroleum Directorate (NPD). 2018. https://www.norskpetroleum.no/en/economy/investments-operating-costs/#operating-costs
Simpson, G. S.; Lamb, F. E.; Finch, J. H. and N. C. Dinnie. 2000. The Application of Probabilistic and Qualitative Methods to Asset Management Decision Making. Paper SPE 59455 presented at the 2000 SPE Asia Pacific Conference on Integrated Modelling for Asset Management. Yokohama. Japan. 25-26 April 2000.
Wang, Z.Guo, X, Thai, G.; Qu, H.; Huang, S.; Zheng, D. and A. M. Kassim. 2016. Portfolio Optimization and Restructuring Strategies for NOC under the Declining Oil Price Environment. Paper SPE 176236 presented at the SPE/IATMI Asia Pacific Oil & Gas Conference and Exhibition. Nusa Dua. Bali. Indonesia. 20-22 October 2015.
Willigers, B.J.A. 2009. Enhanced Economic Modeling by Correlated Stochastic Models of E&P Costs and Hydrocarbon Prices: The Limitations of Fixed Price Decks and the Versatility of Least-Squares Monte Carlo Simulation. Paper SPE 121442 presented at the 2009 SPE Europec/Eage Annual Conference and Exhibition. Amsterdam. The Netherlands. 8-11 June 2009.