Production Engineering II

Introduction

Learning Outcomes
At the end of this lecture, students should be able to :
To discuss all phases of the E & P Business in general.
To mention and explain different types of licensing
agreements.
To describe the major features of a Production Sharing
Contract.
To discuss the Malaysian models of the PSC Terms.

Overview
Exploration & Production Business
Exploration & Production Costs
Petroleum Fiscal Regimes
Production Sharing Contract Terms Malaysian
Models
Q &A

Exploration & Production Business

The Exploration &
Production (E&P)
business is responsible
for upstream oil and gas
activities that will build a
strong, sustainable
portfolio of assets to
support company growth.
The E&P business focuses on high-margin projects that deliver significant
returns, cash flow and long-term value.

One of E&P's key roles is to provide portfolio diversity with low-cost

conventional production, which helps balance against higher cost oil sands
production, particularly when crude prices are low.

Video Presentation

Exploration & Production Business

Phases of Activities in the Petroleum Industry
ACQUISITION OF RIGHTS

To obtain permission from government or relevant agency

before the drilling of Exploration wells.

These can be done through :

i.
ii.
iii.
iv.
v.

Concession [old style]

Production License [new concession]
Production Sharing Agreement
Joint Venture
Service Contract

Exploration & Production Business

Phases of Activities in the Petroleum Industry
ACQUISITION OF RIGHTS

EXPLORATION

To obtain permission from government or relevant agency

before the drilling of Exploration wells.

To search for oil and gas fields

These activities may constitute the following:

a. Gravity and Magnetic Surveys : Mapping of gravity and/or magnetic anomalies due to the
variations of the earths geological structures and
magnetic properties of rocks.
b. Seismic Survey : Seismic lines producing Coarse 2-dimensional seismic grid reflecting
the geophysical nature of the rocks etc.
c. Wildcat : The first exploration well drilled in green field with no offset well information
available to obtain data and prove hydrocarbon presence.

Exploration & Production Business

Phases of Activities in the Petroleum Industry
ACQUISITION OF RIGHTS

EXPLORATION

APPRAISAL

To obtain permission from government or relevant agency

before the drilling of Exploration wells.
To search for oil and gas fields

To determine the commercial significance of the discovery

and to shape the initial development plan for the field.

Exploration & Production Business

EXPLORATION

Appraisal Phase

EXPLORATION DRILLING
RESULTS

Dry

DISCOVERY
APPRAISAL
Appraisal drilling to define the extent of discovery
Data gathering to aid in the development studies
Development feasibility studies
Inconclusive

RESULTS
DEVELOPMENT

QUIT

Exploration & Production Business

Phases of Activities in the Petroleum Industry
ACQUISITION OF RIGHTS

EXPLORATION

APPRAISAL

DEVELOPMENT

To obtain permission from government or relevant agency

before the drilling of Exploration wells.
To search for oil and gas fields
To determine the commercial significance of the discovery
and to shape the initial development plan for the field.

To formulate the Field Development Plan, install platforms /

facilities, drill and complete the development wells.

Exploration & Production Business

Development Phase
The DEVELOPMENT of Production Concept and IMPLEMENTATION activities.
The objectives : To gain maximum recovery with minimum cost.

Factors to be considered in the development plan are:

i)

Drilling requirements : Number of wells, well spacing and drainage pattern,

drilling program, completion strategy, etc.

ii)

Production techniques and policy anticipated : Artificial lift needs, pressure

maintenance, etc.

iii)

Facilities required : Drilling and Production

iv)

Development time and cost expected.

Exploration & Production Business

Phases of Activities in the Petroleum Industry
ACQUISITION OF RIGHTS

EXPLORATION

To obtain permission from government or relevant agency

before the drilling of Exploration wells.
To search for oil and gas fields

APPRAISAL

To determine the commercial significance of the discovery

and to shape the initial development plan for the field.

DEVELOPMENT

To formulate the Field Development Plan, install platforms /

facilities, drill and complete the development wells.

PRODUCTION

To produce oil/gas from sub-surface to surface and to

separate gas/oil/water before oil is stored and gas is
processed.

Exploration & Production Business

Phases of Activities in the Petroleum Industry
ACQUISITION OF RIGHTS

EXPLORATION

To obtain permission from government or relevant agency

before the drilling of Exploration wells.
To search for oil and gas fields

APPRAISAL

To determine the commercial significance of the discovery

and to shape the initial development plan for the field.

DEVELOPMENT

To formulate the Field Development Plan, install platforms /

facilities, drill and complete the development wells.

PRODUCTION

PROCESSING / EXPORT

To bring oil/gas from sub-surface to surface and to separate

gas/oil/water before oil is stored and gas is processed.
To condition the gas / oil and sell to customers.

Exploration & Production Costs

i.
ii.
iii.
iv.

i.

As with most investments, upstream

petroleum projects include the following
types of cash flow:
Revenue
Capex
Opex
Taxes

: Income from sales / services

: Project development
: Project running costs
: Payments to Government

Revenue
The basis of revenue is production.
All income from the sale of goods and services is normally lumped together as
revenue
Rate of production is constrained by facilities, reserve volume & geometry and
energy of the natural system.

Exploration & Production Costs

Elements of production profile
Build Up Phase
The phase of production from start to peak.
It is the time when development wells are
being drilled and new wells are coming on
stream.
Speed of build up is diminished by mechanical
drilling problems, or by unforeseen geological
problems in the reservoir.
Plateau Phase
It can dominate the economic performance of a project must be properly planned.
The higher the peak, the sooner average oil is produced.
Higher rate means higher system capacity, more wells, larger pipes and vessels, more
platforms and more cost.
Therefore, a balance between rate and reserves is important to ensure optimal
economics.

Exploration & Production Costs

Elements of production profile (cont)
Decline Phase
It starts once production falls off plateau.
The decline rate depends on reservoir
architecture and energy.

Economic Limit
A condition of production comes to an end.
Production is terminated for economic reasons.
The operation cost is greater than revenue.

Exploration & Production Costs

ii. Project Capex
For the Project Capital Expenditure, several stages of expenditure are involved:
Exploration [pre discovery]
geology
Appraisal [ pre commercial decision]
geophysics
geology
drilling
geophysics
drilling
well-testing
Field Development
drilling
Field Modifications
production wells
more wells
production facilities
injection facilities
export facilities
Abandonment
artificial lift
seal off wells
removal of facilities

Exploration & Production Costs

iii. Project Opex
It is often called Operating Cost.

Opex may include the following costs :

Lease of facilities.
Platform operation, maintenance and transportation cost.
Workover operations on wells.
Insurance and administration; such as salary.

Exploration & Production Costs

iv. Petroleum Taxation

Why ?
The petroleum industry is a popular target for
government.
Petroleum industries are subject to a wide range
of fiscal systems.

Therefore, it is important to understand the

impact of taxation on project economies.

Petroleum Fiscal Regimes

Licensing is the legal process by which the owner (government) of
subsurface mineral rights grants permission to a company to explore
for and to produce petroleum from a specific area.
There are a number of styles of licensing agreement, which have
been applied within the petroleum industry. The most common are as
follows:i.
ii.
iii.
iv.
v.

Concession [old style]

Production License [new concession]
Production Sharing Agreement
Joint Venture
Service Contract

Licensing Agreements
i.

Concession [old style]

A concession is an arrangement between a government and a

company, whereby the produced oil and gas becomes the property
of the company and the government receives various payments, in
the form of royalties, taxes, etc.
The old style concessions, which predominated in the Middle East
until the 1950s were characterized by large areas, long time
periods and managerial freedom.
This type of agreement was clearly inequitable and conceded
excessive control to the company.
After World War Two, they were gradually replaced by Production
Licenses and by various forms of direct government involvement.

Licensing Agreements
ii.

Production Licenses [new concessions]

Modern production licenses [new concessions] offer much more

control to government.
Prospective areas are divided into many small blocks to increase
competition and to reduce government dependence on any single
company.
Blocks are subject to relinquishment to encourage development.
Licenses relate to shorter time periods.
Companies must compete for licenses on financial or technical
basis.
Development plans are subject to government approval.
Revenues are subject to realistic levels of taxation.

Concessionary Regime
Total net profit for the barrel
of oil = USD 65 (100-35)

Net Take by Government =

USD 38 (20+18)
Net Take by Contractor =
USD 27 (100-20-35-18)

Illustration of the Concessionary Regime Flow Diagram

Licensing Agreements
iii. Production Sharing Agreement & iv. Joint Venture
A PSA is based on the principle that produced oil is shared, or split
between the company and government [or its NOC ] in agreed
proportions.
Approved expenditure may be reclaimed from part of production,

designated as Cost Oil, the remaining part for sharing being called
Profit Oil.
The company may also be liable for profit tax on its share of Profit Oil .
In some cases, the company and the NOC form a separate company for
the purpose of development. This arrangement is a form of Joint Venture.

PSC Cash Flow Diagram

Profit oil is the remaining revenue after cost recovery and royalty.
Assume that cost recovery ceiling is
set at 50% of gross revenue.
Total Profit = USD 40
Profit Split = 30/70
40% tax rate on taxable income
Contractors Entitlement = USD 62
(50+12)

Illustration of the PSC Flow Diagram

Contractors Net Profit After Tax =

USD 7.2 (0.6*12)
Net Take by Government = USD
42.8 (10+28+4.8)

Licensing Agreements
v.

Service Contract

In a service agreement, the company receives no equity in the

project.
All components, including produced oil and gas belong to the state
[through the NOC ].
The company receives a fee for exploration and production
services and may have an opportunity to purchase the production.

Licensing Agreements
Key Differences Transfer of Tittle of Hydrocarbons
With Concessions or Licenses, the title transfers at the wellhead. The IOC
is entitled to gross production minus royalty oil.
With PSCs title transfers at the export point or fiscalization point. The
IOC is entitled to cost oil and profit oil.
With Service Contract title does not transfer. The Government is entitled
to the total hydrocarbon production.

Fiscal System Comparison

Concession/License

PSA

Service Contract

Production Sharing Contract The Malaysian Model

Petroleum exploration in Malaysia started at the beginning of the 20th
century in Sarawak.
Oil was first discovered in 1909 and first produced in 1910.
A national oil company, PETRONAS, was incorporated to serve as the
Governments instrument to take charge of petroleum matters and to
exercise, on behalf of the country, its sovereign rights over its own oil and
gas resources.
PETRONAS opted to adopt the Production Sharing mechanism to manage
the exploration, development and production of the nations petroleum
resources.
Prior to 1975, petroleum concessions were granted by state governments,
where oil companies have exclusive rights to explore and produce
resources. The companies then paid royalties and taxes to the government.

Production Sharing Contract The Malaysian Model

Evolution of PSCs in Malaysia

Production Sharing Contract The Malaysian Model

THANK YOU
2013 INSTITUTE OF TECHNOLOGY PETRONAS SDN BHD
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Q&A
Session