Petroleum Economics

Hasbulnallah bin Mohamed Razali 12577

Project Manager
Aminnol bin Amran 12521
Ahmad Furqan Khairuddin 12514
Mohd Syazwan Bin Abdullah 12036

Multilateral Well :
Analysis

Petroleum Economics

Multilateral Well : Analysis

Contents
Introduction
.........................................................................................................................................................
...........................................................................................Page 3
Objectives & Technical Assumptions
.........................................................................................................................................................
...........................................................................................Page 3
Technical Assumptions
.........................................................................................................................................................
.................................................................................Page 3
Multilateral Well Calculation on Double Junctions
.........................................................................................................................................................
......................................................................................Page 4
Multilateral Well Calculation on Three Junctions
.........................................................................................................................................................
...............................................................................................Page 7
Discussion
.........................................................................................................................................................
..........................................................................................Page 10
Conclusion
.........................................................................................................................................................
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Petroleum Economics

Multilateral Well : Analysis

................................................................................Page 12
References
.........................................................................................................................................................
...........................................................................................Page 14

Introduction
The oil and gas industry, affected by the flows of technology recently even in the past. Therefore, there are many options for
the business to choose the best alternative to maximise profit by utilizing optimally the capital expenditures and operation
expenditures effectively and efficiently. To efficiently develop a field, each reservoir must be completed with a well system
that maximises the hydrocarbon energy. In this assignment, we are interested in multilateral well by using several
alternatives based on feasibility of the system, revenue vs cost, and risk and uncertainty are involved. By using the data from
Guntong oil field, the multilateral well system is analyzed based on Malaysia fiscal agreement. There are several methods of
building a well; vertical, horizontal and multilateral. The main goal is to maximize the production which can be achieved
through technical analysis and to minimize the cost which can be obtained by performing economic analysis.

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Petroleum Economics

Multilateral Well : Analysis

Objectives
1. To learn how to calculate the two and three junctions of multilateral wells.
2. To understand the methodology of technical analysis in deciding type of multilateral wells.

Technical Assumptions
We assume that these parameters will be constant in our analysis:
1. The prices of oil stay constant throughout the years.
2. The operating cost per barrel also will be the same.

Multilateral Well Calculation on Double

Junctions

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Petroleum Economics

Production

: 350bbl/day

Tax

: 40%

Royalty rate

Multilateral Well : Analysis

: 10%

Max negative cash flow

-5.12USD

million (assume maximum)

Oil price

: USD80/bbl

Production decline rate annually

: 5%

Fixed operating cost

USD4500/well

(only

LEVEL 2
JUNCTION

for

one well)
Variable operating cost

: $6/bbl

Water disposal cost

: $2/bbl

Junction production rate

: 60% per junction

Drilling and completion cost

: $6 million

Multilateral junction cost

: Level 2 XUSD 39,000

=USD78,000
Cost ceiling rate

: 50%

Depreciation rate

: 20%

Contractor profit rate

: 44%

Page 5

LEVEL 2
JUNCTION

Petroleum Economics

SUBJECT
Annual oil
Production
(AOP)

FORMULA
2011
Prod bbl/day *
365
day
*
Junction
Production
Rate
*Production
Decline Rate

CAPEX

Drilling
and
completion cost
+
Multilateral
junction cost
Fixed operating
cost +(Variable
operating cost *
AOP)+(Water
disposal
cost*AOP)

OPEX

Multilateral Well : Analysis

2012

2013

2014

2015

2016

361350

343282.5

326118.4

309812.4

294322

2,895,300

2,750,760

2,608,947

2,478,499

2,354,576

6,078,000

revenue

AOP* Oil price

28,908,000
.00

27,462,600
.00

26,089,472
.00

24,784,992
.00

23,545,760
.00

royalty

Royalty
rate*
Revenue
CCr*revenue

2,890,800

2,746,260

2,608,947

2,478,499

2,354,576

14,454,000
.00

13,731,300
.00

13,044,736
.00

12,392,496
.00

11,772,880
.00

Ccf+
Cost 6,078,000
incurred
Min cost(cc or 0
cb)

9,012,300

2,750,760

2,608,947

2,478,499

2,354,576

9,012,300

2,750,760

2,608,947

2,478,499

2,354,576

Cost
ceiling
Cost bank
Cost
recovered

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Petroleum Economics

Multilateral Well : Analysis

6,078,000

17,004,900

21,965,580

20,871,578

19,827,994

18,836,608

7,482,156.0
0

9,664,855.2
0

9,183,494.1
4

8,724,317.1
8

8,288,107.5
2

16,494,456.
00

12,415,615.
20

11,792,441.
34

11,202,816.
38

10,642,683.
52

13,599,156.
00

9,664,855.2
0

9,183,494.1
4

8,724,317.1
8

8,288,107.5
2

Discount rate * 0
CAPEX
Income before
taxCapital
allowance
Tax rate * Tax 0
income

1,223,400

1,223,400

1,223,400

1,223,400

1,223,400

12,375,756.
00

8,441,455.2
0

7,960,094.1
4

7,500,917.1
8

7,064,707.5
2

4,950,302.4
0

3,376,582.0
8

3,184,037.6
6

3,000,366.8
7

2,825,883.0
1

Income
after tax

Income before 0
tax tax paid

7,425,453.6
0

5,064,873.1
2

4,776,056.4
9

4,500,550.3
1

4,238,824.5
1

Cash out

CAPEX + OPEX 6,078,000

+ Tax

7,845,602.4
0

6,127,342.0
8

5,792,984.8
6

5,478,866.0
7

5,180,459.0
1

8,648,853.

6,288,273.

5,999,456.

5,723,950.

5,462,224.

Unrecover
ed cost
profit

Contractor
profit
Cash in

Income
before tax
Capital
allowance
Taxable
income
Tax paid

Net

Cost bank
Cost recovered
Revenue
Royalty Cost
recovered
Contractor
profit rate *
Profit
Cash
recovered
+
Contractor
profit
Cash in- OPEX

cash Cashin

6,078,00
Page 7

Petroleum Economics

flow

Cashout

60

Multilateral Well : Analysis

12

49

Multilateral Well Calculation on Triple

Junctions
Production

:350bbl/day

Tax

: 40%

Royalty rate

: 10%

Max negative cash flow

Oil price

: -5.12USD million (assume maximum)

: 80USD/bbl

Production decline rate annually

: 5%/year

Fixed operating cost

: 4500 USD/well (only for one well)

Variable operating cost: $6/bbl

:6 USD/bbl

Water disposal cost

: 2 USD/bbl

Junction production rate

: 60% per junction

Drilling and completion cost

: USD 6 million

Multilateral junction cost

:Level 3 X USD 39,000 = USD 117 000

Page 8

31

51

Petroleum Economics
Cost ceiling rate

: 50%

Depreciation rate

: 20%

Contractor profit rate

: 44%

SUBJECT
Annual oil
Production
(AOP)

FORMULA
2011
Prod bbl/day *
365
day
*
Junction
Production
Rate
*Production
Decline Rate

CAPEX

Drilling
and
completion cost
+
Multilateral
junction cost
Fixed operating
cost +(Variable
operating cost *
AOP)
+(Water
disposal
cost*AOP)

OPEX

Multilateral Well : Analysis

2012

2013

2014

2015

2016

361350

343282.5

326118.4

309812.4

294322

2,895,300

2,750,760

2,608,947

2,478,499

2,354,576

6,117,000

revenue

AOP* Oil price

28,908,000
.00

27,462,600
.00

26,089,472
.00

24,784,992
.00

23,545,760
.00

royalty

Royalty

2,890,800

2,746,260

2,608,947

2,478,499

2,354,576

rate*
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Petroleum Economics

Multilateral Well : Analysis

Revenue
Cost
ceiling

CCr*revenue

Cost bank

Ccf+
Cost
incurred
Min cost(cc or
cb)
Cost bank
Cost recovered
Revenue
Royalty Cost
recovered
Contractor
profit rate *
Profit
Cash
recovered
+
Contractor
profit
Cash in- OPEX

Cost
recovered
Unrecover
ed cost
profit

Contractor
profit
Cash in

Income
before tax
Capital
allowance
Taxable
income
Tax paid

14,454,000
.00

13,731,300
.00

13,044,736
.00

12,392,496
.00

11,772,880
.00

6,117,000

9,012,300

2,750,760

2,608,947

2,478,499

2,354,576

9,012,300

2,750,760

2,608,947

2,478,499

2,354,576

6,117,000

17,004,900

21,965,580

20,871,578

19,827,994

18,836,608

7,482,156.0
0

9,664,855.2
0

9,183,494.1
4

8,724,317.1
8

8,288,107.5
2

16,494,456.
00

12,415,615.
20

11,792,441.
34

11,202,816.
38

10,642,683.
52

13,599,156.
00

9,664,855.2
0

9,183,494.1
4

8,724,317.1
8

8,288,107.5
2

1,223,400

1,223,400

1,223,400

1,223,400

1,223,400

12,375,756.
00

8,441,455.2
0

7,960,094.1
4

7,500,917.1
8

7,064,707.5
2

4,950,302.4

3,376,582.0

3,184,037.6

3,000,366.8

2,825,883.0

Discount rate * 0
CAPEX
Income before
taxCapital
allowance
Tax rate * Tax 0
Page 10

Petroleum Economics

Multilateral Well : Analysis

income

Income
after tax

Income before 0
tax tax paid

7,425,453.6
0

5,064,873.1
2

4,776,056.4
9

4,500,550.3
1

4,238,824.5
1

Cash out

CAPEX + OPEX 6,117,000

+ Tax

7,845,602.4
0

6,127,342.0
8

5,792,984.8
6

5,478,866.0
7

5,180,459.0
1

cash Cash in Cash 6,117,00

out

8,648,853.
60

6,288,273.
12

5,999,456.
49

5,723,950.
31

5,462,224.
51

Net
flow

Discussion
In any economics analysis, usually we implement several economic indicators that are commonly used in industry to
rank and evaluate projects. For the case of well at Guntong Field, economics analysis regarding that well has been made by
using the expected production to generate revenue and cash flows. Table 1.1shows the input data that has been used at
each well system. Overall, the cost for each wells are the same except for the construction cost at which the three junctions is
slightly higher than the two junctions.
Economic Input Data for Oil Well
Multilateral Well

Three Junctions

Page 11

Two Junctions

Petroleum Economics

Multilateral Well : Analysis

Oil price, $/bbl

80

80

Fixed operating cost, $/well

4500

4500

Variable
$/well

Water disposal, $/bbl

Drilling and completion cost,

$

6,117,000

6,078,000

operating

cost,

Table 1.1
NPV, internal rate of return, profitability index and well payout period are the key indicators that are used to make
economic analysis toward these two types of wells system. However, for the NPV, the lifetime for the well should has been
used to calculate the future sum received, due to lack of data, the fifth year of production has been used in the formula as
the well life.

Economics Results
Multilateral Well

Three Junctions

Two Junctions

Net present value

94,000,000 USD

69,770,000 USD

492.52%

355.17%

Internal
return

rate

of

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Petroleum Economics

Multilateral Well : Analysis

Profitability index

15.36

11.48

Well payout

75 days

101 days
Table 1.2

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Petroleum Economics

Multilateral Well : Analysis

Well Payout for Three Junctions

12000000
10000000
8000000
6000000
Cumulative Revenues4000000
2000000
0

Capex
Cumulative Revenue

100
0 200

Days

Well Payout for Two Junctions

8000000
6000000
Capex

Cumulative Reve 4000000

Cumulative Revenue

2000000
0
0

100 200

Days

Based on Table 1.2, there are four economic analysis

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Petroleum Economics

Multilateral Well : Analysis

results. Three junction of multilateral well internal rate of return exceed the two junctions with 492.52%. Moreover, for the
profitability index, every dollar invested in three junctions will yield 15.36 more cash flow, higher compare with two junctions
at only 11.48. Three junctions take 75 days for well payout while two junctions will need an extra one month more.

Figure 1.1

Figure 1.2

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Petroleum Economics

Cumulative NPV Versus Year

30000000
25000000
20000000
15000000
Cumulative NPV

Three Junctions

10000000

Two Junctions

5000000
0
0 1 2 3 4 5 6
-5000000
-10000000
Year

Cumulative Net Cash Flow Versus Year

35000000
30000000
25000000
20000000
15000000
Cumulative Net Cash Flow
10000000

Three Junctions
Two Junctions

5000000
0

Year Page 16

Multilateral Well : Analysis

Petroleum Economics

Multilateral Well : Analysis

Cumulative Net Cash Flow Versus Year

35000000
30000000
25000000
20000000
15000000
Cumulative Net Cash Flow
10000000

Three Junctions
Two Junctions

5000000
0

Year

Figure 1.3
While looking at the cumulative net cash flow (Fig 1.3), the three junctions exceed the two junctions in the first year of
production and keep on widening the gap each year. Thus the total cash flow for three junctions will be more than the two
junctions.

Conclusion
For the economic analysis it can be seen that constructing a three junctions of multilateral well will produce more cash flow
compare with only two junctions. However, there are several things that need to be taken into consideration when making the
decision. Firstly, the economic analysis is made with limited data available. Moreover, many essential data that are no
present are made into a constant assumption. The assumptions are made based on average characteristics that can be found
at any normal well.

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Petroleum Economics

Multilateral Well : Analysis

Recommendation
1. The research on the multilateral well should be done more in order to decrease cost to build it. This
somehow will contribute to the overall profit.
2. In order to obtain higher amount of revenue, the project should be extended to a few more years so that
the profit can be maximized, given that the oil price and production rate remain constant.
3. It is more saving to drill a multilateral well from the beginning phase itself. It will be costly and troublesome
to build one from a completed vertical well.
#Extra notation
*Well Payout (The amount of time needed for investment return)

Total invesment 6117000

=
=75 days
cash per day
80640

(Multilateral 3 Junction)

Total invesment 6078000

=
=101.3 d ays
cash per day
60000

(Multilateral 2 Junction)

*Net PV & IRR

Multilateral 3 JunctionsNPV: 94 MillionIRR: 492.52%
Multilateral 2 JunctionsNPV: 69.77 MillionIRR: 355.17%
*Profitability Index
3 junctions: 94/6.117=15.36
2 junctions: 69.77/6.078=11.48
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Petroleum Economics

Multilateral Well : Analysis

References

1. Technical, Economic and Risk Analysis of Multilateral Wells, Texas A&M University, December
2008
2. Exxon Reservoir Management Paper, EPMI, ML Trice Jr, Jan 1991
3. ESSO Production Malaysia Inc on Reservoir Management Practices by M.L. Trice Jr, SPE and B.A.
Dawe
4. Maria, D. 2008. TECHNICAL, ECONOMIC AND RISK ANALYSIS OF MULTILATERAL WELLS THESIS,
Instituto Technologico y de Estudios Superiores de Monterrey, Mexico, December 2008.
5. Model of Production Sharing Contract under Petroleum Act

Page 19