SPE 93554

Using Integrated Project Models To Evaluate Field Development Options

M.G. Bilderbeck and I.V. Beck, SPE, Gaffney, Cline & Assocs.

Copyright 2005, Society of Petroleum Engineers Inc.

This paper was prepared for presentation at the 14th SPE Middle East Oil & Gas Show and
Conference held in Bahrain International Exhibition Centre, Bahrain, 1215 March 2005.
This paper was selected for presentation by an SPE Program Committee following review of
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presented, have not been reviewed by the Society of Petroleum Engineers and are subject to
correction by the author(s). The material, as presented, does not necessarily reflect any
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Box 833836, Richardson, TX 75083-3836, U.S.A., fax 01-972-952-9435.

Abstract
This paper presents a practical and effective development
concept evaluation and screening methodology that recognizes
the fundamental relationship between reservoir potential and
field development strategy.
A spreadsheet-based project modelling environment that
integrates reservoir models and a field development planning
model is described. The reservoir models account for
uncertainty in reservoir performance. The field development
planning model handles the scheduling and costing of wells
and processing facilities. The use of uncertainty-based
projections of reservoir performance to drive well and facility
construction plans is illustrated.
The relative merits of adopting a multi-phase approach to
the construction of facilities (to enable the opportunity to learn
about a reservoir as a project matures), as opposed to a singlephase, up-front construction of facilities (to capture economies
of scale), is discussed.
Lastly, the relative impact of uncertainty in the unit cost of
wells and facilities, due to fluctuations in market demand for
oilfield services, is examined.
To illustrate the benefits of this project modelling
methodology, an example of its use is presented. The example
consists of a large Middle East field in which further
development is being considered, to increase production.
Introduction
Decisions to invest in the development of oil fields are always
taken under conditions of uncertainty. The performance that
may be expected of reservoirs is uncertain, as is the economic
climate in which investment decisions are made and the
resulting projects operated. Technical and commercial
analyses used to evaluate the benefits of oilfield developments
and thereby support accompanying investment decisionmaking processes must account for these uncertainties.

Many types of uncertainties must be considered when

evaluating oil field developments. Reservoir performance is
primarily affected by the properties of the reservoir. The
expected reservoir performance is uncertain because the
properties of the reservoir can never fully be defined at the
point in time at which an investment decision is made. The
cost of constructing and operating wells and production
facilities is also uncertain, primarily because the design and
use of these elements is directly a function of the performance
of the reservoir.
While the future performance of an oil field is uncertain,
the reactions of managers to its performance are, by definition,
deterministic. Managers comprehend the reality of a reservoir
as it is revealed through its performance. For this reason,
development plans must have sufficient flexibility to enable
managers to react to, and accommodate, the performance of a
reservoir as it unfolds. Furthermore, any methodology used to
evaluate the benefits of competing development options must
acknowledge and account for the practical nature of field
developments.
Integrated Evaluation Process
The subsurface and surface elements of an oil field are
inextricably linked. These interdependencies must be
recognized and incorporated in any evaluation process used to
support investment decisions. This is accomplished by
assembling an appropriately staffed evaluation team, and using
appropriate evaluation tools.
Integrated Team. A team encompassing at least the
following three broad technical disciplines should work
together to perform an evaluation:
1. Geoscientists, who are responsible for the geological
evaluation of the reservoirs and calculation of the
volumetrics.
2. Reservoir engineers, who are responsible for
preparation of reservoir potential models and
development planning.
3. Production / facilities engineers, who work closely
with the reservoir engineers, to design wells and
facilities necessary to achieve the objectives of the
development plan.
Integrated Tool. An evaluation tool must account for the
combined performance of the reservoir, wells and production
facilities. The spreadsheet evaluation tool described here
(hereinafter also referred to as the Project Model) consists of
several modules, each representing a key aspect of an oil field
development. The tool comprises a set of linked Microsoft
Excel spreadsheets, each of which produces a fundamental

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SPE 93554

Reservoir Potential Models

The objective of reservoir potential modelling is to forecast the
range of production performance that will result from the
evaluation teams understanding of reservoir uncertainty,
given a particular field development concept. A spreadsheetbased Reservoir Potential Model is constructed to represent
each major reservoir in the development.
Key inputs to the Reservoir Potential Models include:
volumes of fluids initially in place, rates of aquifer influx,
shape of watercut development, and maximum water injection
and liquid production rates per well. Key outputs from the
Reservoir Potential Models are annual forecasts of oil, gas and
water production, and water injection, and numbers of new
and operating wells.
Geological Evaluation. In the context of the project
evaluation methodology described in this paper, the output of
geological evaluation is the identification of the reservoir
properties (e.g. heterogeneity) of key flow units and the
volume of fluids initially in place. The emphasis in the
geological work is to describe the uncertainty in reservoir
properties and fluids initially in place, so that these
uncertainties can be accurately represented in the Reservoir
Potential Models.
Form of Models. The Reservoir Potential Models are
simple, analytical material balance models, in which it is
assumed that the reservoir volume of produced fluids is
equivalent to the reservoir volume of water injection (and, if
applicable, water influx from an aquifer). The maximum rate
of water injection is determined by the injectivity of the
formation and the number of water injection wells. The rate of
production is determined by the maximum well liquid rates
and the number of production wells. Depending on the degree
of aquifer influx, either total water injection rate or total liquid
production rate becomes the limiting factor of production.
Producing watercuts are calculated using watercut
development functions based on analytical analysis and/or
output from reservoir simulation models. The watercut
development function is expressed in terms of watercut vs
expected ultimate recovery (EUR). Expressing the watercut
development function in this form enables it to be easily used
with various estimates of initial oil in place and recovery
factor.
In reservoirs in which development is by pattern
waterfloods, sub-models are defined to represent type
patterns for discrete regions of the reservoir. The production
forecast of each discrete reservoir region is calculated by
superimposing the performance of the type pattern, based on
pattern start-up dates. The forecast for the reservoir as a whole
is determined by summing the production from each discrete
reservoir region.

Uncertainty Modelling. The key input parameters in the

Reservoir Potential Models are input in the form of
distributions. Typically, uniform, triangular, normal or log
normal distributions are used, depending on the circumstance.
The values used in these distributions are determined through
extensive discussion by the technical team members. Where
appropriate, the degree of correlation between input
distributions is quantified and input into the model.
Uncertainty in watercut development is accommodated by
entering three curves representing low, most-likely and high
severity of watercut development (Figure 1). The curves are
labeled as function numbers 1, 2 and 3, respectively. The
function numbers are then considered to be a uniform
distribution varying between 1 and 3. (A new curve is linearly
interpolated from the input curves, if a non-integer value is
sampled from the distribution on any given iteration.)
1.0
0.9
0.8
0.7
Watercut (frac)

class of output. The Project Model consists of two main parts:

(a) models which are used to forecast the performance of each
reservoir to be exploited in the project (hereinafter referred to
as Reservoir Potential Models); and, (b) a field development
planning model (hereinafter referred to as the Planning
Model), which is used to construct composite production and
cost forecasts for any field development scenario. Each of
these is discussed in turn below.

0.6

No. 1
No. 2
No. 3

0.5
0.4
0.3
0.2
0.1
0.0
0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Expected Ultimate Recovery (frac)

Figure 1: Typical Set of Watercut Development Functions

To model the effect of uncertainty in input parameters, a

stochastic modelling add-in to Excel, called Crystal Ball, is
used. Crystal Ball uses Monte Carlo simulation to create
distributions of the potential performance of each reservoir,
assuming a given development concept.
Analysis of Results. Following the completion of a Monte
Carlo simulation, the output from the run is examined to
determine which input parameters are driving the results. A
key objective of any evaluation is to identify the combinations
of reservoir input parameters which are associated with low
reservoir performance and the combinations of parameters
which are associated with high reservoir performance.
In the authors experience, it can be useful to define low
reservoir performance as that which results when the
cumulative oil production over the life of a project falls at the
low end of its range, at the same time as the cumulative wateroil ratio (WOR) over the life of the project falls at the high end
of its range. High reservoir performance can be defined to
occur when the reverse situation is true. The premise of these
guidelines is that cumulative oil production is a good proxy for
production revenue, whereas cumulative WOR is a good proxy
for production cost.
Typical sensitivity results for cumulative oil production
and cumulative WOR are shown in Figures 2 and 3. In Figure
2 it can be seen that, in this reservoir, cumulative oil
production is almost solely a function of the assumption of

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SPE 93554

stock tank oil initially in place (STOIIP). Figure 3 shows that,

in the same reservoir, cumulative WOR is a function of
STOIIP and the watercut development function.
Project Cumulative Oil Production

STOIIP

Recovery Factor

Watercut Dev.

Liquid Rate

Water Inj. Rate

Figure 2: Example Sensitivity of Cumulative Oil Production to

Input Parameters

Reservoir Potential Spreadsheets, and it contains algorithms

that estimate the split for production from each reservoir into
appropriate process categories (e.g. high and low pressure
trains).
Facilities. Output from the Production Spreadsheet feeds
to the Facilities Spreadsheet, which imposes and evaluates
production constraints in surface facilities.
Capital Expenditures. Capital expenditures (capex) are
estimated in the Capex Spreadsheet, based on scoping
information determined in the Wells and Facilities
Spreadsheets. This spreadsheet also contains a capex
estimation model.
Operating Costs. Operating costs (opex) are estimated
from cost drivers derived in the wells, production and facilities
spreadsheets.
Economics. This spreadsheet provides a simple discounted
cash flow analysis, along with other industry standard
methods, to assess the economic attractiveness of a project.
A description of each of the elements of the Planning
Model is summarized below.
Drilling and Production Scheduling. In the first
place, the output of the Reservoir Potential Models consists of
forecasts of annual volumes of oil, gas and water production,
and water injection, assuming a reasonably practical
development drilling plan. The forecasts of production and
injection do not account for constraints of surface facilities or
other production capacity limitations, so they represent the
potential of the reservoirs, for the given drilling plan. The
objective of drilling and production scheduling is to fit this
potential within production capacity constraints in a way that
maximizes the economic benefit to the owner.

Project Cumulative WOR

STOIIP

Watercut Dev.

Liquid Rate

Water Inj. Rate

Recovery Factor

Aquifer Influx

Figure 3: Example Sensitivity of Cumulative WOR to Input

Parameters

Field Development Planning Model

The Planning Model integrates the following project elements
to produce composite production and cost forecasts for any
field development scenario:
Drilling and Production Scheduling
Production and Process Rollup
Facilities Modelling
Capital Costs
Operating Costs
Form of Models. The key spreadsheets in the Planning
Model are listed below:
Development Planner. Drilling and production for all
reservoirs is controlled through this spreadsheet.
Wells. This spreadsheet keeps track of the number and
status of wells in each reservoir, and provides a check of
active wells against wells available from stock, new wells, and
abandonments.
Production. The Production Spreadsheet compiles oil, gas
and water production and water injection input from the

The Challenge of Multiple Reservoirs and Common

Facilities. Many large fields in the Middle East (and
elsewhere) are comprised of multiple reservoirs served by
common production facilities. Making optimal use of
production capacity is often challenging. Bottlenecks in
facilities frequently arise due to water or gas production.
Watercuts, in particular, vary from reservoir to reservoir, and
increase as a function of reservoir depletion. Thus, surface
constraints in a given year depend on the production strategy
that has been implemented during prior years.
Quantitative optimisation of field development can be
attempted by the use of linear programming tools. But the
authors have found that such black box approaches to this
problem are not particularly helpful. The Planning Model is
effective largely because of its simple, transparent presentation
of the capacity and use of production facilities.
The Reservoir Potential Models calculate the production
potential of wells in stock and planned new wells. The
Planning Model has the capability to schedule production
potential as required within the constraints imposed by surface
facilities (or any other production limitation). Production is
controlled, for all reservoirs, in the "Development Planner"
spreadsheet.
Reservoir Drilling and Production Priority. Reservoir
development can be scheduled to meet any particular
technical, commercial, strategic, or economic objective. In the

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SPE 93554

Wells

150
100
50
0
-50
2010

2015
New

2020
Abandon

Stock

2025
Active

Figure 4: Well Balance

The Wells Spreadsheet provides input to the capex and

opex elements of the Project Model.

800

90%

700

80%

60%

500

50%
400
40%
300

30%

200

20%

100

10%

0%
2010

2014

2018

2022

2026

Figure 5: Oil Production and Watercut

Output from the Production Spreadsheet feeds to the

Facilities Spreadsheet, which imposes and evaluates
production constraints in surface facilities.
Facilities Modelling. The production potential of
reservoirs often exceeds the capacity of facilities to process
produced fluids. The Facilities Spreadsheet includes a
capacity worksheet that enables the user to determine where
additional capacity is required in any of approximately 20
potential bottleneck areas, including the following key
processes:
Separation
Gas Treatment
Desalting
Oil Export
Effluent Water Handling
Compression
Water Injection
The required additional facilities capacity may be
determined in each area, on an appropriate construction cycle,
in order to maintain the target plateau rate. This, together with
the drilling schedule (from the Wells Spreadsheet), forms the
basis for capital expenditure estimates.
Figure 6 illustrates capacity versus demand for lift gas
compression, showing additions provided to meet demand.
Watercut, a key driver of demand for gas lift, is also shown.

Compression, MMscfd

800

Production and Process Rollup. Production forecasts

calculated by the Reservoir Potential Models are linked to the
Production Spreadsheet in the Planning Model. The
Production Spreadsheet aggregates production from all of the
reservoirs to create the demand for common facility capacity.
The spreadsheet also contains algorithms that estimate the
process split for production from each reservoir (and by
gathering center, if there is more than one in the field),
including:
High Pressure (HP) dry and wet oil
Low Pressure (LP) dry and wet oil
HP and LP water
HP, LP and Tank Vapour (TV) solution gas
HP and LP gas lift gas

Water Cut, %

70%

600

90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

700
600
500
400
300
200
100
0
2010

2015
Capacity

2020
Demand

2025
Water Cut

Figure 6: Lift Gas Compression versus Demand

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Water Cut, %

200

Figure 5 shows a typical graphical representation of output

from the Production Spreadsheet.

Oil Production, MBopd

absence of specific objectives, an appropriate scheduling

default is the economic attractiveness of each reservoir.
Therefore, guidance from an economic model has been
incorporated in each reservoir potential model, with
approximations of associated capex and opex based on cost
drivers and unit costs taken from the Project Model.
Each Reservoir Potential Spreadsheet has a simple
economic model that performs a calculation of discounted
cash flow based on a specified marginal cost target per barrel
of oil. If excess facility capacity is likely, then facility
investments may be excluded from the economic model so that
new wells that might be able to exploit available capacity will
not be seen to be uneconomic.
Drilling plans are devised based on the reservoir engineer's
understanding of the reservoirs, and progressively entered into
the reservoir potential files until net present values calculated
by the economic models stop increasing and start decreasing.
This defines the limit of development.
Owing to the dependence of future production on past
production, it is necessary to include in the analysis both the
past production and a production forecast for the period
preceding any development or redevelopment work.
The Reservoir Potential Spreadsheets are linked to the
Wells Spreadsheet, which serves to compile and check the
count of new wells, abandonments, wells coming on-stream
from stock, and the total number of active wells. A typical
well "balance" is shown in Figure 4.

SPE 93554

Capital Costs. The capex model is an empirical model

that estimates capex by interpolation of a database of actual
costs incurred to drill wells and build process facilities in the
desert terrain of the Middle East and North Africa.
The capex model uses simple but robust cost drivers
derived from the well and facilities modelling. For example,
gas compression capex is derived from horsepower, which is
calculated using simple but accurate relationships between
power, gas flow rate, and pressure differential.
Capex is built-up in the following basic categories:
Wells, itemized by reservoir and subdivided by
type (e.g. singles / duals, producers / injectors,
conventional / non-conventional, gas lift / electric
submersible pump, etc.)
Gathering, Distribution, and Supervisory Control
and Data Acquisition (SCADA)
Process facilities including basic separation and
treatment of oil, gas and water
Gas compression and pipelines
Water injection including treatment for injection
water, pumps and pipelines
Oil export including field storage, pumps and
pipelines
Infrastructure including utilities, accommodation,
warehousing, roads, etc.
Figure 7 shows a typical division of capex into major
elements.
900
800

US$ Million

700
600
500
400
300
200

Total installed capital cost of processing component =

(Qc/Qr)SF*(Qr)*(Cb)*(P)
Where:
Qc = required size or capacity
Qr = reference size or capacity (from database)
Cb = base installed unit cost (from database)
SF = scaling factor
P = processing complexity factor
This relationship is based on research on capital cost
estimation for process facilities.1
The scaling factor varies according to both magnitude of
capacity addition and industrial application. Constant
economies of scale apply within a limited range of capacity
addition. Beyond this range, there are diminishing returns and
the scaling factor increases. A value of 0.6 is commonly used
for single-stream plants, and this figure is often adopted within
an appropriate range.
The processing complexity factor applies to basic
separation, oil, gas and water cleanup. It is determined on the
basis of processing conditions as judged by water production,
propensity for corrosion and scaling, wax, pour point, foam
problems, and other common oil field process problems.
The capex model calculates the total installed cost of
process facilities including direct costs and allocated indirect
costs such as overhead. Major facility investments are divided
into cash flows over a period prior to the on-stream year that
reflects an appropriate project cycle. Costs may be estimated
in any currency, although all costs are typically converted to
U.S.$ for consistency with oil revenue.
Well and facility scoping information for cost estimating is
determined elsewhere and linked to the capex calculation
model. Figure 8 shows a typical profile from the capex model.

100
0
Wells

Gathering

Process
Facilities

Gas
Compression

Water
Injection

400

Infrastructure

3,000

350
2,500
300

Figure 7: Capex Breakdown

2,000

200

1,500

US$ Million

Well construction costs vary widely depending on the

actual drilling conditions encountered in particular reservoirs.
It is not practical to capture this variance in an empirical
model. Instead, unit well costs are determined for each
reservoir (and each type of well) and entered into the
spreadsheet model.
The capex model for process facilities employs
engineering and cost construction relationships taken from a
worldwide technical and cost database collated over many
years. These relationships have been calibrated against the
reference capacities and service conditions contained in the
database for plant costs in the Middle East and North Africa.
The model applies a generalised relationship to make
adjustments for differences in facility size and capacity and to
reflect processing complexity, as follows:

US$ Million

250

150
1,000
100
500
50

2010

2015

Capex per Year

2020

2025

Cumulative Capex

Figure 8: Capex Profile

Operating Costs. The opex model has the same regional

origin (Middle East and North Africa) and empirical basis as
the capex model. It also employs simple and robust cost
drivers, to clearly reflect the reservoir uncertainty analysis.
The frequency and unit cost of some activities is
determined by the difficulty of operating conditions, which is

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SPE 93554

generally assessed in the same way as the processing

complexity factor is determined for capex estimation.
The opex model calculates all costs including direct costs
and allocated indirect costs such as field and corporate
overhead. Direct costs include personnel, contracts and
materials, and utilities. Opex is built-up in basic categories that
are similar to the capex categories (i.e. wells, gathering,
process, etc.).
A cross-check is provided of opex by category against the
input components for each category. A simplified cross-check
is shown in Figure 9:

Wells
Gathering
Process
Chemicals
Oil Export
Gas Handling
ESPs
Water Injection
Field Overhead
Corporate Overhead
Total $MM

Personnel
53
3
138

Contracts &
Materials
106
170

10
28

2
203

37
200
293
763

35
213
146
875

Energy Chemicals Total, $MM

53
109
48
355
200
200
42
53
23
254
92
92
217
289
1
415
439
423
200
2,260

Figure 9: Opex Crosscheck

Opex is particularly sensitive to the number of

development wells, the declining productivity of those wells,
and watercut development. Figure 10 illustrates a typical opex
profile for a maturing field.

A simple but informative way to capture the uncertainty of

different field development scenarios is to plot "relative value"
versus forecast cumulative oil production, where relative value
is the NPV of each scenario divided by the NPV of a selected
"Base Case" scenario.
The modelling approach, with results illustrated by relative
oil versus cumulative oil production, facilitates analysis of
three sources of uncertainty:
Reservoir uncertainty
Time-phasing considerations
Impact of supply and demand on costs
Each of these is discussed in turn below.
Reservoir Uncertainty. Reservoir character is only
revealed through field development. A relatively productive
reservoir with a poor field development plan can lead to the
same economic result as a relatively un-productive reservoir
with a good field development plan.
A fundamental objective of the project modelling approach
is to reveal reservoir uncertainty through the lens of uniform,
consistent, and efficient field development plans.
When project modelling is applied strictly as described
above, the plot of relative value versus forecast cumulative oil
production will reveal a clear relationship. In our experience
with large multi-reservoir Middle East developments, the
relationship may be as simple as a straight line. This is
illustrated in Figure 11.
2,000

200
180
160
140
120

6.00

100
80
60
40
20
0

3.00

1,800

4.00

2.00
1.00

MM Bbls

1,700
5.00

Unit Opex, $/Bbl

and Water-Oil Ratio

Active Wells

1,900

High

1,600
Base

1,500
1,400

Low

1,300
1,200
1,100

0.00
2010

2015
Active Wells

2020
Unit Opex

2025

1,000
0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

Relative Value

Water-Oil Ratio

Figure 10: Unit Opex versus Water-oil Ratio and Active Wells

Figure 11: Reservoir Uncertainty Revealed through Project Value

Uncertainty Analysis
The Planning Model uses the metric of Net Present Value
(NPV) to assess the relative performance of different reservoir
characterizations and field development plans. However, the
revenue used in the analysis is based on an appropriate
marginal cost of supply rather than world oil prices. Analysis
of field development decisions in large Middle East fields at
world oil prices would not reveal the impact of decisions at an
informative scale, as value-adding decisions would be
obscured by the magnitude of revenue.
The marginal cost of supply should be in line with the unit
cost of substantially increasing production from other
properties in the owner's portfolio. Of course this varies
somewhat across the Middle East but a marginal cost of
supply of less than US$5 per barrel would not be considered
unusual.

We believe that a clear relationship between cumulative

forecast oil and relative value signifies that reservoir
uncertainty has been captured and isolated from other "manmade" sources of uncertainty in project value (i.e. poor field
development decisions). The first step of the modelling
approach was specifically designed to achieve this result
through:
Systematic reservoir uncertainty analysis.
Deterministic field development planning that is
optimized to a marginal cost of supply.
A Project Model that applies robust and consistent
cost drivers.
Reservoir uncertainty is the initial focus of attention and
every effort is made to apply consistent and "certain" field
development plans to each realization of the reservoirs. In
each case it is (optimistically) assumed that the team charged

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SPE 93554

with field development will "know" in advance whether they

have been confronted with the low, base or high case
reservoirs, and field development planning has been optimized
accordingly using the economic model embedded in each
reservoir potential spreadsheet, and taking advantage of
available economies of scale in construction of facilities.
A clear relationship between forecasts of cumulative oil
production and relative value suggests that equally efficient
field development plans have been selected to exploit the
reservoir characterization assumed in each case. The results
have not been tainted by non-optimal field development
planning.
Significantly different perceptions of the reservoirs that are
systematically evaluated will yield a different relationship, but
a clear relationship will nevertheless be observed. We have
found that views of reservoirs which have not been
systematically developed will not show a clear relationship
when processed through the project model. Neither will
development scenarios that are not constrained and optimized
to a specified marginal cost of supply.
Time-Phasing Considerations. The field management
team has to decide whether to take a multi-phased approach to
the construction of facilities (which takes advantage of the
opportunity to learn about a reservoir as a project matures), or
up-front, large scale facilities construction (that may yield
economies of scale). The big-ticket capex items needed to
maintain a production plateau in maturing fields, and that
provide an opportunity to exploit economies of scale during
construction, include:
Processing facilities, especially water handling
Gas compression, especially if gas lift is to be
used
Water injection facilities, for water floods
The decision to attempt to exploit economies of scale
naturally depends on the uncertainty of reservoir performance.
As discussed above, if the Project Model is properly applied,
the range of relative value is a direct reflection of reservoir
uncertainty. It follows that a narrow range of relative value
from low to high cases indicates a relatively narrow range of
reservoir outcomes, and suggests that the risk associated with
field development plans that exploit economies of scale is
relatively lower.
The converse is also true. If a wide range of relative value
is indicated, a wide range of (optimized) field development
plans, measured in numbers of wells and facility capacities,
should be expected. This would signify that a multi-phased
approach may be appropriate, since the up-front construction
of large-scale facilities designed for the base case would prove
to be wasteful if the low case were realized.
The Portfolio Effect of Multiple Reservoirs. In
developments that exploit multiple major reservoirs, provided
correlations between reservoirs are sufficiently low, field
management can take advantage of the natural fact that it is
not likely that all reservoirs will turn out to be poor, just as all
are not likely to turn out to be good. This diversification of
reservoir performance will narrow collective variability, and if
sufficiently strong may facilitate construction of large-scale

common facilities at relatively reduced risk. In plain language,

a manager that is concerned about the future performance of
one large reservoir can proceed with greater confidence if the
development plan includes one or two additional large
reservoirs.
The Supply and Demand Cycle. The capital and
operating cost estimates used in the Project Model are based
on unit costs that are in the middle of the range expected
throughout an economic cycle. The sensitivity of project value
to uncertainty in these costs, due to factors such as the varying
intensity of demand for oil field services, can be significant,
especially when project cash flow is evaluated in the context
of a relatively low marginal cost environment. A +/- 20%
variation in unit costs can yield significant variation in project
value if the project is developed in an environment in which
the marginal cost of supply is less than $5 per barrel.
If variation in unit costs is applied uniformly across the
low, base and high cases, the effect is simply to shift the curve
that describes relative value as a function of cumulative oil to
the left or right. The shift can be large when measured relative
to the marginal cost of supply, but would be much less
significant at world oil prices.
Conclusions
Reservoir uncertainty can be effectively captured through the
systematic application of probabilistic methods. However, the
actions and reactions of reservoir managers are deterministic.
The project evaluation method described in this paper provides
a robust and transparent way for reservoir managers to
evaluate and plan their deterministic response to the reality of
the reservoirs.
A fundamental objective of the project modelling approach
is to reveal reservoir uncertainty through the lens of uniform,
consistent, and efficient field development plans. When
project modelling is applied as described in this paper, the plot
of relative value versus forecast cumulative oil production will
reveal a clear relationship which reflects reservoir uncertainty.
If this plot yields a narrow range of relative value it
suggests an opportunity to exploit economies of scale, whereas
a wide range points toward a cautious multi-phase approach.
The portfolio effect of multiple major reservoirs is potentially
a key factor in reducing field development uncertainty and
enabling large efficient up-front investments in common
facilities.
Economic analysis of field development decisions in large
Middle East fields is more informative if the revenue used in
the analysis is based on an appropriate marginal cost of supply
rather than world oil prices.
Project value can be very sensitive to uncertainty in unit
costs, due to factors such as the varying intensity of demand
for oil field services. If the project is evaluated assuming a
marginal cost of supply, its sensitivity to variations in unit cost
are more significant than if the project was evaluated assuming
world oil prices.
References
1.

Brennan, David: Process Industry Economics, Institution of

Chemical Engineers, Rugby, Warwickshire, UK (1998).

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