Oil & Gas Production

Number range CHAPTER**Modern Exploration**

# Oil and gas companies conduct exploration projects worldwide in an attempt to search for and extract this extremely valuable global resource. Early oil and gas explorers relied upon surface signs for finding oil and gas deposit sites. This was truly a hit or miss process.[^1] Today, developments in science and technology have made oil and gas exploration more productive and efficient. Oil and gas exploration encompasses the processes and methods involved in locating and discovering potential sites for oil and gas drilling and extraction. This is the first-stage of oil and gas production. Many uncertainties exist during the exploration process. Geological surveys are conducted using various means from testing subsoil for onshore exploration to using sophisticated technology such as seismic imaging for offshore exploration. 

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#  Exploration cost can vary dramatically. The cost for unsuccessful exploration, which consist of seismic studies and a dry well, can cost \$5 million to \$20 million per exploration site, in some cases much more.[^2] However, when an exploration site is successful and oil and gas extraction is productive, exploration costs are recovered and is significantly less in comparison to other production costs. 

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# **Drilling & Extraction** 

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#  Once a company identifies where oil or gas is located, plans begin to drill an exploratory drill well. Drilling is the final stage in the exploration process. Drilling allows further evaluation of the subsurface and reveals if oil and gas exist at a particular drilling site. Drilling an exploratory well can average 2 to 6 months.[^3] Drilling depths, rock hardness, weather conditions and distance of the site can all affect the duration for drilling. 

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#  There are various types of drilling methods and drilling rigs (platforms) that depend on whether the drilling is for onshore exploration or offshore. Onshore exploration relies on fixed or mobile drillings rigs. Offshore exploration can require a number of different types of drilling rigs, which include fixed offshore Jackup drill rigs, Deep Water Drill Ships, and Semi-Submersible drill rigs.

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# **Onshore Development**

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#  In onshore development (land-based) oil and gas production facilities, the wells are grouped together in clusters forming a gathering system. This gathering system consist of a network of connecting carbon steel tubes which sends the oil and gas to a production and processing facility. The production and processing facility or processing plant, is where the oil and gas is treated through chemical and heating processes. The oil and gas is then seperated from water and sediments and placed in storage after which the resources can be pumped through pipelines to loading terminals where the resources are ready to be transported by oil tankers or transport vehicles. The water removed from the oil and gas is also treated and eventually pumped back into the reservoir.

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# **Offshore Development**

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#  In offshore development drilling wells can be conducted from platform or underwater. Offshore development utilizes both surface and subsurface production facilities. The production and extraction process can consist of fixed platforms or floating vessels.[^4] Offshore rigs contain processing equipment and facilities onboard and the resources extracted are transported by pipeline or stored so it can be loaded on tankers. Additional processing requirements are completed once the resource arrives at onshore production facilities.

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#  In gas production and development, production and condensation plants are required in which a liquefication plant provides treatment, refrigeration and liquefication followed by the storage and loading of liquefied gas. The gas is transferred to liquefied natural gas tankers (LNG's) which transports the gas to a treament plant where the gas undergoes regasification from storage tanks at the plant.

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**Production and Development Costs**

The developement costs include the cost of drilling, the costs of the
production facilities and any systems required for transporting the
resources. Capital cost for developing an oil and gas production
facility can amount to several billion dollars.[^5] Offshore production
platforms must be constructed to withstand extreme weather conditions
such as violent storms and high tides, as well as hurricanes and
typhoons. Below is a production costs summary.[^6]

**[Summary of Costs]{.underline}**

**Direct Costs:**

Process equipment

Utilities

Ancillary equipment

Infrastructure

**Indirect Costs:**

Technical facilities

Construction-related costs

Transport of equipment

**Technical Costs:**

Engineering

**EPC Costs:**

Basic engineering

Surveys

Project management

**Direct Costs**

This is costs associated with the main equipment such as columns,
seperators, rotator drives, etc. that essential for processing plants
and the utilities. Also included is the cost of bulk equipment which
consist of pipes, valves and fittings, electric cables, cladding,
instrumentation, etc. Other direct costs consist of the construction
costs for onshore and offshore platforms, as well as on-site
construction costs.

**Indirect Costs**

Indirect costs includes the cost of transporting equipment, materials,
as well as various structures and stationary and mobile offshore
equipment. General expenses, referred to as EMS (Engineering, Management
and Supervision) cover:[^7]

-   Basic and detailed engineering, audits, and certification

-   Commissioning of structures

-   Management of teams and projects

-   Insurance of structures during construction and installation, and
    costs such as custom duties

    EPC Costs or engineering, procurement and construction costs consist
    of contracting and construction costs of production facilities. EPC
    costs often vary and can be broken down into basic engineering,
    surveys, management, project management and insurance costs.

    **Operating Costs**

    Operating costs are the total expenditures involved in operating a
    production facility. The distinction between capital and operating
    costs in oil & gas production is not always clearly defined.
    According to some studies, the share of the total operating cost is
    made up of four major items, general support (approximately 20% of
    total costs) well-surface operations (roughly 15%), with maintenance
    and logistics (each approximately 15%).[^8]

    The operating costs can be classified according to their function,
    (personnel, services and supplies) or according to purpose (i.e.,
    production, maintenance, security, and others). A further breakdown
    of these cost are listed in the following classification of
    operating costs summary:[^9]

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-   Personnel costs, accommodation, subsistence, transport

-   Consumables (fuels, energy lubricants, chemicals, office supplies,
    technical euipment, such as piping, drill strings, joints,
    catalysts, cladding, molecular sieves, laboratory supplies,
    individual items of security equipment, spare parts, household
    supplies and food)

-   Telecommunications costs, miscellaneous hire charges, service and
    maintenance

    The production and development of oil and gas encompasses an
    extremely sophisticated as well capital and labor-intensive process.
    The exploration and extraction of oil and gas is only the very
    beginning stages of producing the world's most important energy
    resource.

    **Selected Resources on Oil & Gas Production**

    **Clo, Alberto.** Oil Economics and Policy. Boston: Kluwer Academic,
    2000.

    LC Call Number: HD9560.5 .C56813 2000

    LC Catalog Number: 00055994

    This publication covers a number of topics and issues in the oil
    industry which include, petroleum economics, key players and the
    structure of the oil industry, policies and practices of industry
    oligopolies, as well as energy crisis and oil market politics and
    economics.

    **Haag, Jim.** *The Acquistion & Divestiture of Petroleum Property A
    Guide to the Strategies, Processes and Tactics Used by Successful
    Companies*. Tulsa, OK: PennWell Corp., c2005.

    LC Call Number: HD9565 .H29 2005

    LC Catalog Number: 2005298644

    In this text, the author examines both sides of petroleum property
    transactions, drawing on his more than 25 years experience in the
    discipline. Addressing the acquisition and divestiture of individual
    producing or discovered non-producing assets Haag, in step-by-step
    fashion covers the entire process so readers will understand each
    step in the process, know where that step fits in the overall
    transaction, and anticipate what will happen next**.**

    **Hannesson, Rognvaldur.** Petroleum Economics: Issues and
    Strategies of Oil and Natural Gas Production. Westport, CT: Quorum,
    1998.

    LC Call Number: HD9560.5 .H26 1998

    LC Catalog Number: 98006837

    This book provides a comprehensive introduction to the economics of
    oil and natural gas extraction and production along with a detailed
    discussion of pricing, taxing, and markets of these most valuable
    commodities.

    **How Does the Industry Find Oil and Natural Gas?** Society of
    Petroleum Engineers.

    Introduction to Oil & Gas: [http://www.firstbreak.nl/]{.underline}

    Article:

    <http://www.spe.org/spe/jsp/basic/0,,1104_1008218_1109301,00.html>

    <http://www.corrosioncost.com/pdf/oilgas.pdf> \[PDF: 368 KB / 20
    p.\]

    This article discusses how science and technology has developed to
    improve the oil and gas industries ability to locate and see the
    subsurface for exploration. Also discussed, is oil and gas drilling,
    as well as the methods and technology used in drilling.

    **How the 2002 business environment for oil and gas exploration and
    production has developed around the world.** *First Break*, *News
    Feature*. February 2002, pp. 80-87.

    Abstract:
    http://www.blackwell-synergy.com/doi/abs/10.1046/j.1365-2397.2002.00249.x

    This article is an adapted version of a report by the Economics
    Division, Institut Francais du Petole studying the global business
    environment over a two year period in the oil and gas industry. The
    article focuses on recent developments in the oil and gas industry
    and the prospects for year 2002.

    **Kronman, George E., editor.** *International Oil and Gas Ventures:
    A Business Perspective.* Tulsa, OK: American Association of
    Petroleum Geologists, 2000.

    LC Call Number: HD9560 .I557 2000

    LC Catalog Number: 00057622

    Contributors from various aspects of the international oil
    exploration and production (E & P) business examine business and
    management aspects of oil ventures. Themes include key components of
    E & P in the global marketplace, international E & P strategic
    issues, partnerships and alliances, and international operations.
    Specific topics include the World Bank\'s intervention on petroleum
    exploration in developing countries, business practice and ethics in
    a multicultural environment, private capital participation in
    Venezuela\'s oil sector, and security issues for the international
    oil and gas industry. Synopsis by *Book News, Inc*.

    ***Oil and Gas Exploration and Production.*** Institut Francais Du
    Petrole Publications, Center for Economics and Management. Paris:
    Edition Technips, 2004.

    LC Call Number: HD9560.5 .R34313 2004

    LC Catalog Number: 2004459848

    Number range CHAPTERThis book provides a complete overview to the
    stakes and challenges involved in oil and gas exploration and
    production. Following a historical review and a survey of the
    markets, the technical phases are covered, as are the evaluation of
    reserves, the estimation of investments and costs, the
    decision-making and control processes, and the accounting, legal and
    contractual environment for these activities. The book concludes
    with a discussion of the role of safety, and of environmental and
    ethical issues. Description by *Books In Print*.

    **What is the Role of Technology in Oil and Gas?** Society of
    Petroleum Engineers.Article:
    <http://www.spe.org/spe/jsp/basic/0,,1104_1008218_1109714,00.html>

    This Internet article explains the role of utilizing advanced and
    developing technologies in discovering and producing oil and gas
    resources. The article discusses seismic imaging technologies,
    drilling technology, advanced offshore production facilities, as
    well as the oil and gas industries efforts in applying technological
    innovations to increase production efficiency, develop new treatment
    methods, and enhance environmental protection.

    **Wood, Andy.** Global Exploration - Beyond Nintendo. *First Break,
    News*. July 2001.

    <http://www.firstbreak.nl/>

    Andy Wood, head of global exploration of Shell International,
    provides an overview of how a major global oil company plans to
    attract a continuing stream of geoscientist and other energy
    industry professionals.

    **Yeomans, Matthew.** *Oil: Anatomy of an Industry.* New York: New
    Press, c2004. LC Call Number: HD9560.5 .Y46 2004

    LC Catalog Number: 2004040151

    In this book the author explores the role of oil in America from
    driving the U.S. economic engine, to consolidating the U.S. position
    as unilateral superpower and explains the American consumer love
    affair with gasoline and the automobile. Along the way, Yeomans
    offers a brief history of gasoline: where oil comes from, how the
    global crude oil market works, and how the price of oil is regulated
    and set. Illustrated with maps and graphics, *Oil* spotlights the
    companies involved in global oil production, considering their
    relationships with oil-rich countries and the power they wield in
    the global marketplace.

    **References**

[^1]: "How Does the Industry Find Oil and Natural Gas?" Society of
    Petroleum Engineers. Internet site:
    http://www.spe.org/spe/jsp/basic/0,,1104_1008218_1109301,00.html

[^2]: *Oil and Gas Exploration and Production: Reserves, Costs,
    Contracts*. Paris: Centre for Economic and Management, Institut
    Francais Du Petrole, c2004, p. 146.

[^3]: "How Does the Industry Find Oil and Natural Gas?" Society of
    Petroleum Engineers. Internet site:
    http://www.spe.org/spe/jsp/basic/0,,1104_1008218_1109301,00.html.

[^4]: *Oil and Gas Exploration and Production: Reserves, Costs,
    Contracts*. Paris: Centre for Economic and Management, Institut
    Francais Du Petrole, c2004, p. 66.

[^5]: Ibid, p. 134.

[^6]: Ibid, p. 137.

[^7]: Ibid, p. 140.

[^8]: Ibid, p. 152.

[^9]: Ibid, p. 152.