Economics and Appraisal of Conventional Oil and Gas in the Western Gulf of Mexico
Authors: Attanasi E.D. , Haynes J.L. 
Published: December 2007

Summary
The oil and gas industry frequently appraises undiscovered oil and gas resources on a regional basis to decide whether to start or continue exploration programs. The appraisals are of little value unless conditioned by estimates of the costs of finding and producing the resources. This paper presents an economic appraisal of undiscovered oil and presents an economic appraisal of undiscovered oil and gas resources in the western Gulf of Mexico. Also presented are a description of the model used to make the presented are a description of the model used to make the assessment, results of a sensitivity analysis, and a discussion of the implications of the results to the industry. The appraisal is shown to be relatively robust to changes in physical and engineering assumptions. At $30/bbl [$4.76/m ] oil equivalent (OE) and a 15 % required rate of return (ROR), commercial oil and gas discoveries are expected to amount to about 15 % of the 25.19 × 10 bbl [4 × 10 m ] OE contained in fields discovered before 1977 in the studied area. Hydrocarbons in future discoveries are expected to be 71 % nonassociated gas, 17 % crude oil, and 12 % other forms. Moreover, it will continue to be economically optimal to drill about three wildcat wells in the Miocene-Pliocene trend for every wildcat well drilled in the Pleistocene trend. Because the number of commercial discoveries was found to be quite sensitive to economic conditions, the analysis has important implications in terms of forecasting future industry drilling and other associated activities in the western Gulf of Mexico.

Introduction
The petroleum industry prepares regional appraisals of undiscovered oil and gas to determine the desirability of starting or continuing exploration programs. However, to be useful for planning, these resource appraisals should be accompanied by estimates of the expected costs of finding and producing the resources. Fields of insufficient size will not be developed, so not all prospects identified by geologists can be considered economic targets. A model may be applied to screen prospects or in some way identify that part of the estimated undiscovered resources that will be of economic interest. The screening device should be flexible enough to handle various assumptions and changes in future economic and technologic conditions easily. We present an appraisal of undiscovered potential conventional oil and gas reserves along with their associated exploration, development, and production costs for the offshore western Gulf of Mexico in waters as deep as 656 ft [200 m]. The study area is shown in Fig. 1. These estimates are expressed as a function of price and required ROR. This study complements an earlier set of studies on the Permian basin that demonstrated methods for explicitly combining economics with petroleum resource appraisal. After a brief sketch of the model's methodology and physical and economic assumptions (a more detailed physical and economic assumptions (a more detailed discussion is presented in Ref. 4), the reference appraisal is presented. A sensitivity analysis of the appraisal to various physical and cost assumptions is presented. These results provide guidance for model refinement and are also useful in the strategic planning for industry R and D efforts. The appraisal results for the study area relate to fields to be discovered after Dec. 31, 1976.

Methodology
The algorithm estimates the amount of undiscovered conventional oil and gas expected to be commercially profitable to explore and produce at various assumed product profitable to explore and produce at various assumed product prices, costs, and physical field characteristics. This prices, costs, and physical field characteristics. This algorithm uses predictions from a discovery-process model of the size distribution of fields to be discovered with successive increments of exploration effort. Discoveries then are classified according to type (crude oil or nonassociated gas) and by water depth. Computations are carried out in two stages. First, the after-tax net present values (NPV's) of the representative fields for present values (NPV's) of the representative fields for each size and water depth class are computed (1) to determine which classes of discoveries are commercially profitable and (2) to provide data for determining how much profitable and (2) to provide data for determining how much additional exploration is justified economically. The second part of the algorithm involves imposing an exploration stopping rule on successive increments of exploration effort. Additional exploration is no longer commercial when the expected after-tax NPV of the commercial fields identified by the next increment of wildcat wells is insufficient to cover the incremental exploration costs. Fig. 2 is a schematic of the cost algorithm. Because predictions from the discovery-process model are predictions from the discovery-process model are frequencies of new discoveries for field-size classes expressed in barrels of oil equivalent (BOE), the costing algorithm first classifies new fields into oil and gas, respectively, and by various water depth intervals in order to perform the discounted-cash-flow analysis. For all calculations that follow, 6,000 cu ft [169 m3] gas was taken to be equal to 1 bbl [0.16 m3] OE oil.