A Real Options Approach to the Gas Blowdown Decision

Abstract

Many oil fields have gas caps or associated gas. The common approach for these fields is to continue to produce oil, whilst re-injecting any gas produced, for as long as it is profitable, and then produce gas. This approach is motivated by the belief that it will maximize the oil reserves and thus maximize the overall value of the field. In this paper we show why maximizing the length of profitable oil production does not necessarily create the most value. The analysis also provides guidance and insight on operating decisions that would not be obtained through a more conventional approach. In this paper we show how a real options valuation approach can be used to determine the optimal blowdown decision. The approach we take is to re-inject gas to maintain oil production only until the time it is more financially valuable to produce gas and thus blow-down pressure support for oil production. To model price uncertainty we use correlated two-factor price processes. We also consider, uncertainties in oil and gas reserves and production as well as in transition costs. The model is solved using the Least-Squares Monte Carlo simulation approach. We use a material balance simulator, which is embedded into the underlying model, to represent the oil and gas production. We illustrate how the approach can be used to identify optimal blowdown time, and thus maximize value, for a North Sea based oil field with associated gas. Our results indicate that the value-maximizing blowdown time is different than would be computed using traditional net present value. Furthermore, the approach we take in this paper yields a decision-policy “map” that indicates the optimal choice given the state of oil prices, gas prices, production rates, costs, and remaining reserves in any given year. The results presented here are relevant and applicable to oil and oil/gas fields across the world. Calculating the optimal blowdown time is not straightforward as it is a function of the underlying uncertainties such as oil and gas prices, their co-variation, oil and gas reserves and production, blowdown costs, and technology improvements, and its calculation is not trivial. However, ignoring these uncertainties leads to sub-optimal blowdown decisions, resulting in significant value losses.

Experimental determination of relative permeabilities and critical gas saturations under solution-gas drive

“…Often, the best option to extend a flooded reservoir's life in terms of cost, ease of implementation, and environmental impact, is depressurization below the bubble point. Thus, a great interest revived in the last two decades in both the oil industry and academia in considering depressurization as an improved oil recovery mechanism (de Mirabal et al, 1996;Goodfield and Goodyear, 2003;Jr et al, 2004;Lago et al, 2000;Ligthelm et al, 1997;Naylor et al, 2001;Thomas and Bratvold, 2015).…”

Rapid screening of oil-rim reservoirs for development and management

“…More instructive, they queried the general focus on technical factors, at the expense of equally important non-technical factors (commercial and strategic), in the current practices of screening oil-rim reservoirs for exploitation. In line with this thought, Thomas and Bratvold (2015) earlier argued that maximizing the production time of profitable oil at the expense of the associated gas-cap does not necessarily guarantee the return of maximum value from an oil-rim development project.…”

“…Fig. 1 Configurations of oil-rim reservoirs in plan and cross section, where GOC and OWC are the gas-oil contact and oil-water contact, respectively (Lawal et al 2010) The arguments and counter-arguments for these options are diverse and tend to vary from one case to the other, underscoring the need to improve the current body of knowledge on this subject for better decision-making (Obidike et al 2019a, b;Thomas and Bratvold 2015;Garimella et al 2010;Clarke et al 2006;Uwaga and Lawal 2006).…”

“…In searching for an optimum solution, the rigorous evaluation of the various development options often requires extensive reservoir simulation studies. This optimization problem entails multiple variables, which include geologic, engineering, economic, regulatory and operational factors (Ziablitckaia et al 2019;Elharith et al 2019;Ogolo et al 2018;Dilib et al 2015;Thomas and Bratvold 2015;Chan et al 2014;Uwaga and Lawal 2006). These variables usually exhibit varied dependencies, thereby complicating the problem of selecting the most appropriate combination of well type, development concepts and production constraints.…”

Offshore Exploratory Drilling Campaigns During Oil Price Downturns: Maximizing Value Creation from Flexibility

“…This method has been previously used for evaluating optimal decisions in Oil and Gas (O&G) projects: Thomas and Bratvold (2015) illustrated the implementation of this approach to find the optimal blowdown decision, Alkhatib and King (2011) used it to determine the optimal time to start surfactant flooding in Enhanced Oil Recovery (EOR) projects, whereas Jafarizadeh and Bratvold (2012) implemented it to estimate the optimal time to abandon an oil field case.…”