Risk Analysis in the Petroleum Production Industry
Authors: Hirakawa Seiichi , Kato Masakazu 
Published: December 2007

Introduction

Degree of risk in the petroleum production industry is generally higher than the one in the usual industry. Characteristics both technical and economical would not be known determistically. For the evaluation of investment project, it is essential to consider sufficiently the possibility to occur any disadvantageous events for the investor and then risk analysis should be very important.

Japanese petroleum exploration and development operation is remarkably active in oversea areas as well as in domestic area. From the economical points of view, excess investment to limited concession area should be avoided. Such economical analysis has been taken place briefly through manual calculation so far, and this has contributed to the management, however, recent advance of effort to establish the mathematical-economical criteria has offered valuable contribution. Introduction of probabilistic approaches using computer has become routine works in several Japanese oil companies.

EARLY WORKS IN JAPAN

Japanese Ministry of International Trade and Industry (MITI) has eargerly guided the techniques of risk analysis regarding petroleum production industry so far. Around 1965, few models of oversea production industry so far. Around 1965, few models of oversea fields including South-eastern Asian offshore field South-eastern Asian on land field, and Middle-eastern on land field were assumed and projects of long-term investment and cash flow were reported from the committee. Two years later, research group for planning the fundamental policy of domestic petroleum development was established. It is true that domestic production has remained at a low level, however, it is the most stable source of supply and furthermore it contributes remarkably to the economical growth of local areas in North-eastern Japan.

Data of reserves and cost regarding domestic fields were summarized in Figure 1 to 4. An example of economical model analysis of Middle Eastern offshore oil field recently published is shown in Table 1 (end of the paper).

SCALE OF FEASIBLE OIL FIELD

In 1969, MITI has established the Sub-committee for study the scale of feasible oil field (chairman; Dr. S. Hirakawa, University of Tokyo) in Petroleum Exploration and Advisory Committee (PEAC). The Sub-committee Petroleum Exploration and Advisory Committee (PEAC). The Sub-committee was requested to offer the report in only three months and he limited the subject to technical and economical analysis of development of Japanese continental shelf. In his study, expected scale of oil field to be discovered was assumed (models A, B and C) Amounts of investment to be required for exploration and development and predicted revenue from petroleum production were calculated according to flow chart shown in Figure 5. Factors of model fields to be studied range as follows; water depth 30 - 80 meters, distance from coast 6 - 20 kilo-meters. Amount of gas of 1,000M3; was converted to oil of 1 kilo-liter. Cost of exploration was assumed to be 1,000 yen per unit kilo-liter (about 0.60 dollar per barrel). Petroleum products would have market evirons of oil fields, and the price of crude oil and natural gas were assumed to be 6,300 yen/k1 and 7 yen/m respectavly. Economical conditions including interest and prices are consistent through the exploration and development periods of oil field.

According to the conclusion derived from the report of this Sub-committee, feasible project would be obtained only when the recoverable reserves of above 10,000 M kilo-litres are ascertained. However, in the case of oil field which hold the recoverable reserves between 10,000 M kilo-litres and 5,000 M kilo-litres, the field sometimes would be feasible if the development conditions including water depth and distance from the coast are favorable. Sub-committee concluded finally that it is important to establish the detailed computer-based evaluation system regarding the relation between scale of field and economics and to contribute over-all Projection of Japanese long-term exploration scheduling. Projection of Japanese long-term exploration scheduling.