Economic Life of Oil and Gas Fields in the United States
- W.S. Eggleston (Consulting Petroleum Engineer)
- Document ID
- Society of Petroleum Engineers
- Journal of Petroleum Technology
- Publication Date
- June 1966
- Document Type
- Journal Paper
- 661 - 664
- 1966. Society of Petroleum Engineers
- 4.6 Natural Gas
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- 572 since 2007
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The economic life of oil and gas fields can he divided into four diagnostic periods of time: (1) the initial development period; (2) the time lag in years from discovery date to year of peak production; (3) the half-life period; and (4) total years of economic life. A working knowledge of these factors could be useful in planning development, programming future expenditures and in making preliminary valuations.
Although the economic life of oil and gas fields has occupied the attention of economists, appraisal engineers and reservoir engineers for many years, it was not until the Phillips decision in 1959 that the question of the relative life of oil and gas fields became a controversial issue. The decision in the Phillips Case' in discussing the Reserves Added Realization method (RAR) made the following observations: "Caplan (a witness) concluded that in determining current relative commercial importance of the additions to reserves of the several primary products (oil, gas and natural gas liquids) it was necessary that the future flow of revenue from these several sources should be discounted ... After considering various alternative possibilities Caplan adopted a 20-year discount period for gas and natural gas liquids, and a 10-year discount period for oil . . ." In defense of the 20 and 10 ratio for gas and oil fields, Caplan stated: "I assumed that the 20 and 10 represented a reasonable approximation of the relative lives of the gas and oil reserves. Now that didn't mean that there would be 20 years for the gas or there would be 10 years for the oil, but that the 20 and 10 represented a reasonable relationship between the reserves and their recoverability." The following discussion is intended to develops a method by which the economic life of oil and gas fields may be measured in a consistent and logical manner. The economic life of oil and gas fields can be divided into diagnostic periods of time that are significant measurements in determining a basis for classification and analysis.
Initial Development Period Definition: the amount of oil or gas produced during the first ten years as a percentage of the ultimate production.
Money is frequently borrowed during the early life of an oil or gas field to finance development work. investment bankers and financial houses are primarily concerned with rates of production, and the amount of production that will be recovered during the period of a loan. Oil loans are normally collateralized by the oil and gas reserves. To keep the risk factor small, the remaining reserves at the end of the loan period should he substantial. It is, therefore, pertinent to determine the percentage of the total ultimate production that is most likely to be produced in the early life of an oil or gas field.
Year of Peak Production Definition: the time in years from the date of discovery to the year of peak production. The year of peak production generally signals the end of major development costs and is frequently the year of maximum operating profit. (This year may not be the year of maximum net profit since income taxes and accounting practice will have an effect on the net profit.) The peak production of a field is generally a clue and often a guide to the size of the field and the extent and amount of reserves. There is often a close relationship between rates of production and reserves, particularly in fields within the same petroleum province.
The Half-Life Period Definition: the half-life period is defined as the time in years required to produce one-half of the total estimated recoverable production (ultimate reserves). Oil and gas recoverable during the half-life period have a greater value than the oil and gas recoverable in the later stages of production both from an operating cost standpoint and a present worth basis.
Total Economic Life Definition: the number of years from discovery date to the year when the economic limit of production is reached. The total economic life of an oil or gas field has a bearing on the commercial life of the operator and upon the hydrocarbon reserves that can be carried on the books of a company.
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