LEARNING SERIES: MAJOR PHASES OF UPSTREAM OPERATIONS Development Planning By Farouk Al-Kasim 1. Major Concerns for Government 2. EIA as the Basis for Planning 3. Dialogue among Main Stakeholders 4. Content of a Field Development Plan 5. Development Strategy 6. Unitisation Issues 7. Infrastructure Development 8. Social Impacts 9. National Participation 1 Major Concerns for Government 2 1 The start of field development planning • After the declaration of commerciality, the licensees will normally conduct various technical, commercial, and logistical investigations in order to prepare specific plans for developing the discovery. • Various development and production concepts are normally considered and compared at this stage. • They are then narrowed down to a limited number of choices for assessment in rather greater detail. • Ultimately, only one concept remains, and this becomes the basis for more detailed engineering work aimed at optimising its economics and efficiency. 3 2 The objective of field development >> The host country’s objective in field development is as follows: To produce petroleum in a manner that optimises recovery; avoids harm to the overall environment; optimises investment and operating cost; and provides a source of revenue that can be used to create sustainable benefits to the society. In each case, the host country must monitor operations to ensure compliance with legislation and the terms of the contract. 4 3 Why is the host country concerned with field development? What is at stake for the host country? • The investment in field development offshore can be 30 to 50 times larger than the investment in exploration. • As an illustration, in a hypothetical field the exploration cost was US$100 million, while the value of the revenue from the field was over US$3 billion. • The monetary value as well as the economic and social significance of field development to the host country is therefore enormously more than that of exploration. • The host country must In each case, therefore the host show country must the operations monitor utmost toofensure diligence when merits and evaluating thecompliance shortcomings with legislation of the and the terms field of the development plan contract. 5 (FDP) before approving it. 4 What is at stake for the host country in the development phase? The host country has some major concerns in the development phase: 1. That all potentially commercial discoveries are properly documented and evaluated 2. That the evaluation of commerciality is well considered from all angles to ensure development of optimal number of discoveries 3. That preparations for an FDP consider the country’s priorities, overall interests and concerns 4. That the final development plan avoids any potential harm and contributes optimally to the total economic and social development plans in the country 5. That the country’s requirement for petroleum and petroleum products are fully considered and addressed in the FDP 6. That the option for government participation is exercised based on an optimal development plan 6 5 How can the host country be prepared to take the right action at the right time? • By following up on the assessment of resources in all prospects that are potentially of commercial interest • By monitoring exploration drilling and updating the resource-base assessment locally and regionally • By ensuring that optimal data, including from testing, are collected from exploration wells to ensure adequate assessment of discoveries and of HC potential generally • By starting a positive dialogue with licensees on the modalities of field development to improve benefit to the economy and way of life as well as eliminate potential harm 7 EIA as the Basis for Planning 8 6 Environmental Impact Assessment The International Association for Impact Assessment defines an Environmental Impact Assessment (EIA) as "the process of identifying, predicting, evaluating and mitigating the biophysical, social, and other relevant effects of development proposals prior to major decisions being taken and commitments made.”* • The term "strategic environmental assessment" (SEA) applies to impact assessments related to policies, plans and programmes most often proposed by organs of state.* Typically, SEA is carried out by government before the start of petroleum operations to assess the feasibility of doing so. • EIAs require decision-makers to account for environmental values in their decisions and to justify those decisions in light of detailed environmental studies and public comments on the potential environmental impacts.* *Wikipedia 2020. 9 7 Expectations from EIA For the purpose of the FDP, the host country requires the licensees to • Identify biophysical, social and other • Predict related impacts • Evaluate caused by the field • Mitigate development plan. • The FDP must therefore provide the basis for evaluating the environmental, social, and other relevant impacts of the proposed development plan. • If any of the impacts are deemed to be negative, a plan for their mitigation shall be presented by the licensees. 10 8 Tasks for government triggered by EIA >> On the basis of the EIA, the government has two major tasks: 1. To study the EIA report in order to ensure that all the potential negative impacts arising from the proposed petroleum development operations have been identified, evaluated, and adequately mitigated insofar as the licensees are in a position to do so. 2. That any impacts that are beyond the powers of the licensees are adequately identified and evaluated by government as part of its role in social governance. 11 9 Mitigation tasks for government >> Some of the negative impacts that the government may have to mitigate include the following: • • Negative effects arising from the high speed of operations after starting production Negative impacts arising from the high wages offered by the petroleum industry relative to traditional local industries • Negative effects arising from major population migration • Negative impacts on the competitiveness of local export industries • The effects triggered by an appreciation in domestic currency • Negative effects arising from exaggerated expectation by citizens in general and by petroleum rich provinces in particular • Negative effects arising from a sudden surge of petroleum revenue in the country >> It is important to note that the tasks exemplified above are 12 normally administered by several ministries. Dialogue among Main Stakeholders 13 10 • Dialogue before implementation Once the licensees have contracted development work to contractors and subcontractors, changes to the field development plan will result in prohibitive additional cost. • Since the licensees invariably recover all their cost from revenue, it is the government that will eventually pay for additional cost. • Changes in development plans are very costly in the offshore sector because of the limitations imposed by platform space. • Government must therefore suggest changes before the implementation of field development plans. 14 11 Dialogue between government and licensees >> To avoid expensive delays in government, approval of the FDP it is thus essential to maintain an open dialogue with the licensees on major government requirements while the plan is being prepared. Issues raised during the dialogue can include the following: • The level of uncertainty in the data basis for development and the need for more data to reduce uncertainty • The rationale for the plateau rate and possible damage to recovery • The need for pressure maintenance and other options for IOR relatively early in the production lifetime • The need for acquiring reservoir monitoring data from production wells in order to avoid potential damage and introduce the right measures in time • Plans for the utilisation of associated gas • Optimisation of the infrastructure development in the region • Optimisation of decommissioning activities. • Measures on health, safety ,and environmental protection 15 12 Monitoring dialogue within the license group • If allowed to attend the licensee’s meetings, the government will be able to gain a good understanding of the project and its assumptions. • This is especially informative if there are several licensees in each license group. • In Norway, the authorities are allowed to sit as observers in all license meetings, without the right to speak or vote. • The national company may vote if it has a commercial 16 participation in the license. Content of a Field Development Plan 17 13 • The contents of an FDP A plan for the drainage of petroleum from the reservoir, including number of wells, spacing, production plateau level, measures for pressure maintenance, IOR techniques, fluid front management, etc. • A plan for data acquisition and monitoring of reservoir response • A plan for future stages of development if field development is staggered • EIA and a plan for mitigation of accidents • A plan for the processing / treatment of oil and gas in the field • A plan for the transportation of oil and gas to points of sale • A plan for the proper utilisation of gas • A strategy for the tail-end and decommissioning phases • Options for handling government’s share of crude according to contract 18 14 >> In Norway, follow-up during field development planning focuses on the following: • • • • Norwegian practice The resource base Depletion Strategy Development concepts The infrastructure • Coordination • Outer environment • Energy efficiency • Profitability, with special focus on social economic feasibility • Uncertainties • Expansion and prolonged utilisation of existing infrastructure • Barriers against accidents to protect human life, outer environment, and assets, including regularity • Application of principles for risk reduction • Factors related to the work environment that can affect health and well-being • Reliability factors that influence operational regularity / robustness / maintainability • Preparedness, hereunder the ability to control and limit loss in case of accidents 19 • The use of new technology and work methods Development Strategy 20 15 Reservoir characterisation >> Reservoir characterisation may be defined as “efforts to determine by direct measurement or laboratory analysis, under drilling or production, the salient properties of the reservoir that may be relevant to the understanding of how hydrocarbons flow in the reservoir under production or the flow of injection fluids for that purpose.” • The raw data for reservoir characterisation consist of cuttings, cores, petrophysical logs, seismic data, production tests, interference tests, build-up analysis, etc. • Understanding the pore throat geometry is vital for visualising how fluids may flow through the reservoir rock and how such movement can be enhanced to improve hydrocarbon recovery. 21 16 • Reservoir engineering Reservoir engineering aims to understand the manner in which hydrocarbons and injected fluids may flow in the reservoir rock. • Based on the best reservoir characterisation and visualisation data, a reservoir simulation model is first constructed and then continually calibrated against actual performance. • The reservoir simulation model is used to test and finally design the most efficient method of recovering oil and gas from the reservoir. • Simulation models are only as good as the data upon which they are based. 22 17 >> OPTIONS FOR RESERVOIR SEQUENCING • • • • Optimum depletion strategy Develop each reservoir separately. Commingle related reservoirs in the field. Develop reservoirs in progressive stages. Abandon noncommercial reservoirs. >> OPTIONS FOR PRESSURE SUPPORT • Suitability of water, gas, or other injection • Optimal time to start injection • Strategy for even displacement of petroleum • Uncertainties and contingencies >> OPTIONS FOR IOR and EOR APPLICATION • Ways of accelerating production without harming recovery, including horizontal wells, multilateral completion, tighter well spacing, selective perforation and stimulation, work- over operations, timely water treatment, etc. 23 Unitisation Issues 24 19 • The licensees’ interest upon unitisation Unitisation takes place when the partners holding the rights to an oil and/or gas accumulation extending over more than one licence area decide to pool their individual interests to create a single unit. • Licensees are interested in keeping their share undiminished by the unitisation process itself. They are also interested in who assumes operatorship once the field is unitised. • The host country’s interest is to prevent deterioration in the recovery of resources as well as defending the country’s share where a field crosses the border to a neighbouring country. • All participants in the unitisation process should be interested in its success to prevent the chaotic situation of preemptive competition. 25 20 What is the interest of the host country upon unitisation? >> The regulator monitors unitisation discussions for the following objectives: • The methodology agreed to by the parties is sound and not detrimental to prudent resource management. • The criteria and methodology used to determine reserves in place will not distort reservoir visualisation for the purpose of optimising resources recovery. • The cut-off criteria used to determine unit shares must be realistic in terms of the recovery mechanisms adopted in the PDO. • All potentially productive reservoirs are included in the scope of the unit. • The total impact of the unit agreement should not inflate development costs. • In short, the unit agreement must be conducive to the best possible development plan for the unitised reservoirs 26 21 • • Signed agreement The final stages in the process of awarding petroleum rights start when negotiations appear to be reaching a conclusion. Once the government and the successful applicants have negotiated open clauses in the model contract, the two team leaders initial the final draft. • Requests from the Cabinet and or the board for amendments to the agreed contract draft are not uncommon. • There are many examples of contracts that must be renegotiated at this stage following a request from the highest authority on either side. • Once authorities have ratified a contract, the minister is usually authorized to sign the contract and the license on behalf of the government. In some host countries, however, the documents are approved and endorsed by the Cabinet or Parliament. 27 Infrastructure Development 28 22 • • Using excess capacity in existing infrastructure The host country should aim to optimise the development and use of infrastructure. As more fields are developed, it should be possible to use some of the excess capacity in the older processing and transportation infrastructure. With the right rules for third-party access to the infrastructure, the cost of processing and transporting petroleum from the wellhead to the market should become less than that based on new investment. This would help increase the wellhead value of the remaining resources. • It is therefore important to consider field development in a regional context whereby some of the new discoveries can reduce their capital investment cost by utilising existing capacity in existing infrastructure. 29 23 Regional optimisation >> In order to gain the full benefit of the regional optimisation approach, the following becomes obvious: • The benefit will increase appreciably if the government could influence the sequencing of developing fields of affiliated characteristics. • The benefit will increase if the development of the infrastructure is designed to serve the development of the oil or gas fields. • The benefit will also increase if the ownership of the infrastructure is designed to change with the real users of the infrastructure at any time. • Prudent resource depletion and development strategies should aim for an optimum ramp-up of petroleum production in pace with a synchronised 30 development of the infrastructure. Social Impacts 31 24 The scope of social impacts • The oil industry is known to be dynamic and rich. It is partly for this reason that developing countries look forward to persuading oil companies to come and look for oil in their country. • Although the exploration phase does not involve intensive investment in the host country, the impact of activity by several oil companies’ on a modest economy and limited infrastructure can be noticeable. • Once a big discovery is made, however, the impact on citizens’ expectations can be overwhelming. During the development and subsequent production, the impact on society is noticeable, affecting both economic and social developments. • Once petroleum revenue is anticipated, the pressure exerted by individual citizens to obtain a piece of the nation’s wealth will be a real challenge for the authorities. 32 25 Managing expectations and petroleum revenues • The challenge for government is to convince the citizens as a whole that the revenue must be used wisely and gradually so as to secure lasting benefit to all citizens while avoiding misuse on short-term egoistic pursuit of wealth and pleasure. • A moderate tempo in development would help a great deal in mitigating the threat of sudden surge in revenue. However, if several fields were to be developed more or less simultaneously, the pressure on the economy and social life would be hard to control. • It would help if the challenge of sudden surge in revenue had been fully anticipated and dealt with in the petroleum policy and in legislation. In any case, open communication with the citizens organisations based on transparency is key to success in managing public expectations and the utilisation of revenues. 33 National Participation 34 26 The FDP offers a valuable opportunity for national participation • A host country can benefit greatly from petroleum if it can use the opportunity to develop its competence and capacity so as to participate in the operations. • There are two modes of participation: o It can develop its local content to deliver goods and services to petroleum operations, thereby receiving a portion of the cost in its national economy as wages to its own citizens. o It can also participate as an investor in petroleum operations, thereby increasing the nation’s share of the profit from operations. • A prerequisite for successful national participation must, however, be that it does not lead to deterioration in the quality of the installations or the operations. To prevent this, the government must prepare the national industry through specially tailored capacity and competence development programmes. 35 27 The FDP offers a valuable opportunity for national participation (continued) • It is assumed that the government has been preparing the local industry for its role as participant in petroleum operations. It is also assumed that the choice has been made as to the extent and nature of participation. • Once the FDP is approved, it will form a concrete basis for implementing the plans for national participation and local content. • Regarding the option for national participation in the contract, the FDP forms a central document for the government to evaluate whether it should exercise the option or not. • When it comes to developing the local content, the FDP gives valuable detailed information on the nature of intended works. This information is very useful for the development of the local content with a view for getting contracts with the operator, first over the period of field development, but 36 also over the much longer period of production once production starts. Thank you for your attention! 37