the economics of enhanced oil recovery: does it make cents?
TRANSCRIPT
The Economics of Enhanced Oil Recovery: The Economics of Enhanced Oil Recovery: Does it Make Cents?Does it Make Cents?
James M. GriffinJames M. GriffinProfessor of Economics & Public PolicyProfessor of Economics & Public Policy
Bush School of Government & Public ServiceBush School of Government & Public ServiceTexas A&M UniversityTexas A&M University
September 15, 2008September 15, 2008Jackson Hole, WyomingJackson Hole, Wyoming
4 Key Drivers of EOR Profitability4 Key Drivers of EOR Profitability::
1.1.
Reservoir characteristicsReservoir characteristics
2.2.
Future price of oilFuture price of oil
3.3.
Price of C0Price of C0
22
4.4.
How you perform your economicsHow you perform your economics
Is the Net Present Value (NPV) of future cash flows positive?
Standard Formula for Profitability:Standard Formula for Profitability:
PPtt = price of oil in year t= price of oil in year tQQtt = the projected = the projected incrementalincremental amount of oil recovered in period tamount of oil recovered in period txxRR = royalties= royaltiesxxSPSP = severance and property taxes= severance and property taxesqqp p
tt = = ccr r
ttqqr r t t = cost of recycling and reinjecting CO= cost of recycling and reinjecting CO22
cco o tt = other incremental operating costs= other incremental operating costs
K = upfront investment costsK = upfront investment costsr = discount rate r = discount rate
T (1−xR)(1−xSP) − − crt
qrt
−
cot
NPV = ∑ −Kt=1 (1+ )t
Source: “Identifying Profitable CO2 Projects in Wyoming.” 2008. Phillips et al.
Pt
Qt qpt
r
P
p cost of CO2
Future Oil Prices: Future Oil Prices: What Can We Say Intelligently?What Can We Say Intelligently?
They will fluctuate!They will fluctuate! Source: Energy Information Administration
Forthcoming Book with Yale Forthcoming Book with Yale University Press:University Press:
““A Smart Energy Policy:A Smart Energy Policy:An EconomistAn Economist’’s Rs R
xx
for Balancing Cheap, for Balancing Cheap, Clean, and Secure EnergyClean, and Secure Energy””
Dr. James M. GriffinDr. James M. Griffin
1. China1. China’’s Oil Demand Has Mushroomeds Oil Demand Has Mushroomed
Source: International Energy Agency (2008)
2. OPEC2. OPEC’’s Capacity Limits Prevented s Capacity Limits Prevented Increased ProductionIncreased Production
Figure 2.3: Spare Capacity in OPEC vs. Oil Prices
0
1
2
3
4
5
6
2000
2001
2002
2003
2004
2005
2006
2007
Spar
e C
apac
ity M
M B
/D
0
20
40
60
80
100
120
140
Pric
e (U
S$)
Spare CapacityOil Price
Source: International Energy Agency (2008)
3. Worldwide Refining Capacity Is the 3. Worldwide Refining Capacity Is the BottleneckBottleneck
Figure 2.4: Price Premium for Light Sweet Crude Oil(Price WTI Crude - Price Mayan Crude)
0
2
4
6
8
10
12
14
16
18
2000
2001
2002
2003
2004
2005
2006
2007
2008
Dol
lars
/ B
arre
l
Source: Energy Information Administration (2008)
4. Shortage of Low4. Shortage of Low--Sulphur Diesel Fuel Sulphur Diesel Fuel Figure 2.5: Premium for Diesel Fuel Over Crude Oil
(Price Diesel - Price WTI Crude)
0
5
10
15
20
25
30
35
40
2000
2001
2002
2003
2004
2005
2006
2007
2008
Dol
lars
per
Bar
rel
Source: Energy Information Administration (2008)
5. Declining Value of the Dollar 5. Declining Value of the Dollar
6. The real culprits are the international 6. The real culprits are the international oil companiesoil companies
7. Wall Street speculators are the 7. Wall Street speculators are the culpritsculprits
••
Tremendous influx of funds to commodity Tremendous influx of funds to commodity index fundsindex funds
8. Peak oil production proponents8. Peak oil production proponents
••
NonNon--OPEC production has or is nearing OPEC production has or is nearing its peak its peak ––
Colin Campbell Colin Campbell
••
OPEC production has peaked as wellOPEC production has peaked as well----Matthew Simmons Matthew Simmons ––
““Twilight in the DesertTwilight in the Desert””
Ghawar is in declineGhawar is in declineSaudi Reserves are a fabrication?Saudi Reserves are a fabrication?
9. OPEC Cartel9. OPEC Cartel
9. The OPEC Cartel Is Propping Up Prices9. The OPEC Cartel Is Propping Up Prices
Source: British Petroleum Statistical Review (2008)
Figure 2.6: Demand Growth Met by OPEC and Non-OPEC Sources 2001-2007
2004 2007200620052001 2002 2003
-3
-2
-1
0
1
2
3
4
MM
B/D
0
20
40
60
80
100
120
140
Pric
e (U
S$)
Non-OPEC Production GrowthOPEC Production GrowthOil Prices
Long Run Oil Prices Will Be Determined Long Run Oil Prices Will Be Determined by Supply & Demand Fundamentalsby Supply & Demand FundamentalsChinaChina’’s oil demand has mushroomeds oil demand has mushroomedOPECOPEC’’s capacity limits prevented increased s capacity limits prevented increased productionproductionWorldwide refining capacity is the bottleneckWorldwide refining capacity is the bottleneckThe shortage of lowThe shortage of low--sulphur diesel fuel is driving up sulphur diesel fuel is driving up oil pricesoil pricesThe declining value of the dollar is the cause of high The declining value of the dollar is the cause of high oil pricesoil pricesThe real culprits are the international oil companiesThe real culprits are the international oil companiesNo, Wall Street speculators are the culpritsNo, Wall Street speculators are the culpritsWorld oil production has peakedWorld oil production has peakedThe OPEC cartel is propping up pricesThe OPEC cartel is propping up prices
Four Keys to the Four Keys to the Future Oil Price PuzzleFuture Oil Price Puzzle
1.1.
Emergence of China & other Asian Emergence of China & other Asian countries as major oil consumerscountries as major oil consumers
2.2.
Can and will OPEC expand capacity?Can and will OPEC expand capacity?3.3.
What is the long run price elasticity What is the long run price elasticity of oil demand?of oil demand?
4.4.
What is the supply responsiveness What is the supply responsiveness from nonfrom non--OPEC sources?OPEC sources?
Conventional oil outside OPECConventional oil outside OPECOil substitutes Oil substitutes –– oil sands, GTL, Ethanoloil sands, GTL, Ethanol
Key 1: Robust Demand Growth Key 1: Robust Demand Growth from China and Other Asiafrom China and Other Asia
Decade of 1990s World GDP Growth = 2.8% / yr
Decade of 2000s World GDP Growth = 3.9% / yr
Every 1% higher GDP growth = extra 750,000 B/D
Key 2: Key 2: CanCan and Will and Will OPEC Expand Capacity?OPEC Expand Capacity?
The Problem Is Not the Limits of The Problem Is Not the Limits of the Resource Basethe Resource Base
Figure 5: Physically Possible Saudi Production through 2050
0
5
10
15
20
25
30
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Mill
ion
Bar
rels
per
Day
The Supply Potential of The Supply Potential of Six OPEC CountriesSix OPEC Countries
Table 1
Actual Reserves, Undiscovered Reserves, and Years Remaining
Country Reserves+ Estimated Undiscovered Total Years Remaining*
Saudi Arabia 263 87 350 86.9
Iraq 115 45 160 240.9
Iran 133 53 186 125.9
Venezuela 77 20 97 88.4
Kuwait 99 4 103 106.8
The United Arab Emirates 98 8 106 105.6
+In billion barrels as of 2005; *Assuming current production rate
Sources: British Petroleum Statistical Review, United States Geological Survey
Response to DoomsdayersResponse to DoomsdayersSome Interesting Arithmetic:Some Interesting Arithmetic:••
Oil Reserves in 1975: Oil Reserves in 1975: 386 bil bbl386 bil bbl••
Cumulative Oil Production Cumulative Oil Production --
800 bil bbl800 bil bbl(1976(1976--2006)2006)
______________________________
••
Current Oil ReservesCurrent Oil Reserves
1317 bil bbl1317 bil bbl
MITMIT’’s Workshop on Alternative Energy s Workshop on Alternative Energy Strategies (1977)Strategies (1977)••
Peak between 1983 and 1993Peak between 1983 and 1993
Hubbert Curve for 2000Hubbert Curve for 2000••
50% of actual50% of actual
Even if peak in conventional oilEven if peak in conventional oil……••
What about EOR, Oil Sands, and GTL?What about EOR, Oil Sands, and GTL?
Key 2: Can and Key 2: Can and WillWill OPEC Expand Capacity?OPEC Expand Capacity?
Possible ConstraintsPossible Constraints••
Physical limits of resource basePhysical limits of resource base
••
NOCNOC’’s Access to technical expertises Access to technical expertise••
Investment funds necessaryInvestment funds necessary
Paradox of RichesParadox of Riches
••
GeoGeo--political constraintspolitical constraintsIraq, Iran, and VenezuelaIraq, Iran, and Venezuela
Keys 3 & 4: Keys 3 & 4: The Long Term Effect of PricesThe Long Term Effect of Prices
High
Oil Price Scenario
Figure 5The Supply/Demand Balance Under Continued High Prices
0.0
20.0
40.0
60.0
80.0
100.0
120.0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Mill
ions
of B
arre
ls D
aily
Non-OPEC Oil + NGL Non-Conventional Fuels OPEC Oil + NGL
Keys 3 & 4: Keys 3 & 4: The Long Term Effect of PricesThe Long Term Effect of Prices
Low
Oil Price Scenario
Figure 6The Supply/Demand Balance Under Reversion to Low Prices
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Mill
ions
of B
arre
ls D
aily
Non-OPEC Oil + NGL Non-Conventional Fuels OPEC Oil + NGL
WhatWhat’’s my Bottom Line on Oil s my Bottom Line on Oil Prices?Prices?
Plan for Considerably Lower Oil Plan for Considerably Lower Oil pricespricesAnd Hope youAnd Hope you‘‘ll be pleasantly ll be pleasantly surprised!surprised!
Is a Project Viable at $40 oil?Is a Project Viable at $40 oil?WhatWhat’’s the upside at $60, $80, $100?s the upside at $60, $80, $100?
Break Time: Watch those UrinalsBreak Time: Watch those Urinals
4 Key Drivers of EOR Profitability4 Key Drivers of EOR Profitability::
1.1.
Reservoir characteristicsReservoir characteristics
2.2.
Future price of oilFuture price of oil
3.3.
Price of C0Price of C0
22
4.4.
How you perform your economicsHow you perform your economics
How Important is Price of COHow Important is Price of CO22 ??
Example of Elk Basin fields (PExample of Elk Basin fields (Poiloil
= $100)= $100)
Price of COPrice of CO22
NPV @ 20% (in millions)NPV @ 20% (in millions)$1 / mcf $ 1,375$1 / mcf $ 1,375$2 / mcf $ 1,132$2 / mcf $ 1,132$3 / mcf $ 889$3 / mcf $ 889
Source: Owen Phillips, K.T. van’t Veld, and B.R. Cook. May 30, 2008.
What Do COWhat Do CO22 Contracts Look Like?Contracts Look Like?
Standard Contract = Base Price + Standard Contract = Base Price + PricePrice
x[maximum[(Poilx[maximum[(Poil
tt
––
floor) or 0]floor) or 0]
e.g.e.g.$2.00 / mcf = 1.00 + .02[$100 $2.00 / mcf = 1.00 + .02[$100 --
$50]$50]
Set Base Price = Marginal Cost of Production + Set Base Price = Marginal Cost of Production + TransportationTransportation
••
Structure the contract so that even in low oil price Structure the contract so that even in low oil price world, you will continue COworld, you will continue CO
22
injectioninjection
x = Allows COx = Allows CO22 seller to share oil price riskseller to share oil price risk
••
Set x so that COSet x so that CO
22
Provider shares in upsideProvider shares in upside
Optimal Contract:Optimal Contract:
How to Perform Your EconomicsHow to Perform Your EconomicsUsual Approach:Usual Approach:••
Build in oil price risk with higher Build in oil price risk with higher discount rate (r)discount rate (r)
r = .20 or .25 > cost of capitalr = .20 or .25 > cost of capital
Alternative ApproachAlternative Approach(1)(1) Adopt a much lower discount rate Adopt a much lower discount rate
r = .12 r = .12
(2)(2)
Build in oil price risk with conservative Build in oil price risk with conservative oil price assumptionsoil price assumptions
Alternative Approach ContAlternative Approach Cont……
Analyze 4 states of the worldAnalyze 4 states of the world: : using using lower discount rate & conservative oil lower discount rate & conservative oil prices as discussed earlierprices as discussed earlier••
r = .12 r = .12
(1) P(1) Poiloil = $40 + inflation= $40 + inflation(2) P(2) Poiloil = $60 + inflation= $60 + inflation(3) P(3) Poil oil = $80 + inflation= $80 + inflation(4) P(4) Poil oil = $100 + inflation= $100 + inflation
Source: Owen Phillips et al.
Source: Owen Phillips et al.
What is the NPV of oil prices at What is the NPV of oil prices at $100 / barrel in 20 years?$100 / barrel in 20 years?
@ 12% @ 12% discount ratediscount rate
$10.36$10.36
@ 20% @ 20% discount ratediscount rate
$2.61$2.61
IsnIsn’’t there an option value to Lance t there an option value to Lance Creek post EOR flood? Creek post EOR flood? ••
Chemical floodsChemical floods
••
New technologies not even dreamed of New technologies not even dreamed of todaytoday
The End!The End!