Production Business Processes
Lesson Overview
The Production Business Processes Lesson consists of the following topics:
- Learning Objectives
- Typical Production Organization
- Production Technical Disciplines
- E&P Support: Accounting
- E&P Support: Finance
- E&P Support: Planning, Marketing and HR
- Field Operations – Onshore
- Field Operations – Arctic and Offshore
- Field Operations – Offshore
- FDP – Field Development Plan
- FDP Example: US Hugoton Field
- Well History: Components & Importance
- Regulatory Considerations
- Environmental Considerations
- Health & Safety Considerations
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Typical Production Organization
A typical organization for the Production Department in an E&P company is shown in the chart, and is often aligned by geography and technical discipline.
The production department is responsible for the safe and efficient operation of the company’s wells, while meeting the requirements of federal and local government regulations.
The production department is also responsible for well testing, production measurement and control.
Production Technical Disciplines
A production department includes the following key technical disciplines and roles:
- The Development Geologist develops a Field Development Plan to maximize the long-term recovery of the reservoir. A primary role is to negotiate and acquire additional production licenses.
- Petroleum Engineer is a broad term referring to those associated with the subsurface engineering activities related to the production of crude oil or gas. Petroleum Engineers and Geologists are the two main subsurface disciplines within E&P that focus on maximizing economic recovery of hydrocarbons from subsurface reservoirs.
Petroleum Engineers focus on estimation of the recoverable volume of the resource — using a detailed understanding of the physical behavior of oil, water and gas within the porous reservoir rock.
Petroleum Geologists focus on providing a static description of the hydrocarbon reservoir rock. The combined efforts of Geologists and Petroleum Engineers throughout the life of a hydrocarbon accumulation determine the way in which a reservoir is developed and depleted, and they usually have the highest impact on the economics of a production field.
A Production Engineer is another term for Petroleum Engineer when the primary role is to monitor and maintain production forecasts for the current wells. Another typical role is to identify and define workover and stimulation opportunities to enhance recovery. Production Engineers manage all production-related activities and keep a history of all work conducted on the well.
Reservoir Engineers play a central role in field development and production planning by recommending cost effective reservoir depletion and enhanced oil recovery (EOR) schemes such as water-flooding or gas injection to maximize hydrocarbon recovery.
A Facilities Engineer is responsible to design and optimize the oil and gas surface facilities such as: pipelines, processing equipment for oil/water separation, dehydration, vapor recovery and gas handling. Another important aspect is to design and implement automated well testing and well safety control systems. Facilities Engineers need strong project management skills and are also responsible for the environmental worthiness of the producing property.
E&P Support: Accounting
In most E&P organizations, a large volume of daily transactions are associated with the wide geography, number of wells and facilities, and product sales — often requiring a large support staff. Accordingly, this lesson gives details on the key E&P support functions.
The Accounting function in an E&P company manages the complex transactions specific to the oil and gas industry, is usually centralized and includes:
The General Accounting function that:
- Maintains general ledger, vouchers, cash receipt and disbursement records.
- Records business transactions to prepare financial statements.
- Prepares relevant budgets or statements and reports.
- Keeps records of equipment and supply inventories and maintains physical inventories.
The Accounts Payable function that:
- Allocates credits and records debits to proper accounts.
- Pays lease obligations, production royalties, severance and related taxes.
The Property Accounting function has a number of oil and gas specific duties, including:
- Calculating depreciation, depletion, and amortization for oil and gas properties.
- Managing Authorizations for Expenditures (AFEs), which are used to obtain budget approval for projects.
- Tracking work-in-process to determine if actual costs are within approved budgets.
- Providing reports and journal vouchers for, owned and operated properties; as well as lease and well equipment contracts.
The Revenue Accounting function has a number of oil and gas specific duties, including
- Recording oil and gas revenue for every property.
- Keeping property records to be compliant with regulations and taxes.
- Calculating payment to those who get royalties and sends relevant reports.
- Obtaining payment from buyers of oil and gas products.
- In the US, managing Division Orders, the mechanism for allocating revenue to (often)multiple owners of an oil and gas property.
Managing Joint Interests in property ownership, drilling operations and oil & gas production, includes
- Keeping documents and contracts regarding all joint operations.
- Preparing billing to joint owners, and reviewing all billings from joint owners.
- Preparing statements for jointly operated properties and lease operating statements
- Drawing up payout status reports according to various contract types.
- Administering joint interest audits of charges and income distributions from joint ventures
- Managing joint interest audits with partners.
E&P Support: Finance
Finance responsibilities carried out by a centralized treasury and finance department often include:
- Acquiring sufficient funds via access to the capital markets.
- Building effective relationships with banks and lenders.
- Managing cash receipts and disbursements.
- Domestic and international tax reporting and compliance.
- Complete the appropriate regional filings for applicable oil and gas production and severance taxes.
E&P Support: Planning, Marketing, HR
The Planning function helps quantify the strategic goals of the company; communicate those goals to the operating groups and monitor performance. Typical duties include:
- Establishing parameters that are used to quantify and operationalize the corporate strategy.
- Identifying investment opportunities to help the E&P company achieve its strategic goals.
- Creating portfolio options for different external conditions (i.e. price assumptions, tax and royalty parameters, etc.) to determine how best to mitigate implementation risk.
- Monitoring implementation and effectiveness of the planning process.
An E&P company might have more than one Marketing department responsible for coordinating sales of either oil or gas. Many E&P companies also hedge their oil and gas production price exposure through a variety of risk management instruments, also managed by Marketing.
- Oil Marketing: The crude oil market is well established and transparent. Typical practice is that the oil is sold to a wide variety of customers at a spot or auction price, with 30-day contract supply terms. The prices become a part of public surveys by Platts or Argus. Crude prices fluctuate based on location and quality differentials.
- Natural Gas Marketing: Today, gas producers sell natural gas directly or through third party marketers to a variety of large wholesale gas customers. Gas prices are much more volatile than crude prices. Again, hedging of natural gas price risk has become a common practice among E&P companies.
- Human Resources (HR) responsibilities carried out in an E&P company are typical of other large companies
- Managing the hiring and staff replacement process.
- Ensuring a competitive set of compensation and benefit tools are in place.
- Managing workplace compliance with all national and regional regulations.
- Participating in training, development and staff planning for the operating groups.
Field Operations – Onshore
The major challenge in managing onshore production operations, especially in the US and Russia, is monitoring equipment and managing personnel and contactors spread over a wide geographic area.
For example, the Yates Field in West Texas pictured in the NASA photograph, covers over 21,700 acres (34 square miles). In this satellite photograph, numerous white well locations and petroleum drilling structures can be seen that mark the field.
Daily checks are needed of producing wells, tank batteries and contractor progress on workovers and other maintenance work to ensure the operating cost of the lease does not get out of hand. The difficulty with simply getting around in the terrain can be seen in the photo.
Field Operations: Arctic
Arctic and offshore oil and gas production are more complex than any land operation.
In the North American and Russian Arctic, the extremely cold conditions, a short “summer season” and lack of site accessibility tend to make production more difficult and much more expensive. Arctic sites must be self-sufficient for production staff for long periods of time. Site equipment must run non-stop to keep from freezing.
Steam tracing and heaters are used at various points in the facilities and pipelines to keep the oil and treating chemicals moving. Roads periodically have to be re-graded to stay passable.
Particular care needs to be taken with development of facilities in the Arctic permafrost, which is the layer of soil or bedrock beneath the surface, where the temperature has been below freezing continuously for several thousand years.
Field Operations: Offshore
Offshore operations must also be self-sufficient. All personnel, equipment and stores must be brought to location by helicopter or supply vessels. The production platform and equipment is also subjected to the harsh “salty water” environment. Salt air is highly corrosive and special coatings and maintenance procedures are needed to minimize corrosion.
The US Gulf of Mexico and the North Sea are also susceptible to hurricanes and severe storms where staff must be evacuated and platform operations shut down until the storm passes.
Life on an offshore platform is unusual, as the quote from an Ekofisk employee on location in the North Sea blog below indicates:
“Ekofisk is not just one platform a mile or two offshore, it is a string of eight platforms, almost a mile long.
Ekofisk is located literarily in the middle of the North Sea at a point 200 miles from Norway, the British Isles, and Germany. In this remote and stormy environment, a string of platforms had to be built so that much of the oil drilling and processing would occur where the oil came out of the North Sea’s floor, 200 feet below the water.
One comes and goes from Ekofisk by helicopter when at all possible, or by a long work-boat ride if it is too stormy. We lived offshore eight days in a row, working twelve hour days. Since there was not much to do except eat and a nightly movie, it was just as well!
The complex included not only the drilling rigs, but facilities for the 500 men and women including the six-story hotel platform. The hotel platform had sleeping quarters (two to a room) first-class dining hall, 115 seat movie theater, pool room, small library/reading room, chapel, and exercise room.
Everything was self-contained in this mile-long complex. In a book I read about space travel, the author commented that in studying space station design requirements, they are looking at the experiences of oil rig complexes such as Ekofisk.”
Field Development Plan (FDP)
The key document that drives Production Operations is called a Field Development Plan (FDP).
An FDP is designed to economically recover remaining reserves as efficiently as possible, especially those that do not appear to be drained by existing wells.
FDP’s comprise all activities and processes required to develop a field: environmental impact, geophysics, geology, reservoir and production engineering, infrastructure, well design and construction, completion design, surface facilities, and economics and risk assessment.
A typical FDP focuses on the techniques needed to:
- develop a reservoir model,
- define a drainage philosophy,
- locate new wells, and
- design and engineer the wells.
An FDP describes the timeline for execution of the plan and includes needed surface facilities and ongoing operations management needs.
FDP Example – US Hugoton Field
A FDP optimizes the development and overall value of an asset.
For example, the Hugoton fields in southwestern Kansas constitute the largest gas producing area in North America. As the chart shows, the fields extend over Texas, Oklahoma and Kansas. The length of the field is 175 miles and its width varies from 20 to 50 miles.
Since 1928, these gas fields have produced 27 trillion cubic feet of gas. Even with this long history of substantial production, there is not a publicly available, field-wide study of how best to explore, produce, and regulate the remaining gas reservoirs.
An industry study has been underway since 2005 by the key operators and the Kansas Geological Survey to gather and catalog the knowledge and technical information needed for continued improvement in recovery strategies in the Hugoton fields.
Production Operations
Production Operations is that part of an E&P organization which attempts to maximize production in a particular field in a cost-effective manner using a Field Development Plan (FDP).
Four major disciplines are usually involved in developing and executing the FDP:
- Planning is led by production engineers who are responsible for well performance data and the well history information from the field.
- Geologists provide formation evaluation data to help construct a composite reservoir description for computer modeling.
- Reservoir engineers have the greatest overlap with production engineers. Their well history and well performance data helps define a field-wide, long-term, reservoir optimization study.
- Drilling engineers create the all-important wells, including directional and horizontal completions.
Well History: Components & Importance
A key part of oil & gas field documentation in called the well history. The well history records all the technical and commercial information on every well in a particular field.
Some wells and fields have been active for almost 100 years. Production Operations keeps a record of anything that affects the ability of a well to continue to produce, such as:
- Oil, gas or water production volume (by day, week or month)
- Well construction
- Workover technique and results
- Well log and the geophysical data
These data are used to build a computer model of what has happened during the life of the reservoir. This technique is called history matching to get the model data to reflect actual field performance. Once matched the model can help plan new recovery techniques.
Regulatory Considerations
Each regulatory authority holding an interest in the production lease governs the reporting and operating regulations for the onshore or offshore producing properties in their jurisdiction. Regulations cover oil and gas extraction, production and transportation.
A sample list of necessary and typical filings to a US state authority is shown in the chart. Similar data is required for operations in the North Sea and other major global fields.
Particular attention is paid to the monthly production volumes because in the US, state severance taxes are taken from these numbers.
Production operations is responsible for complying with applicable regulations and making sure all monthly and annual reports are filed in a timely and accurate manner.
Many regulatory authorities are now using electronic (web-based) filings to streamline the process.
Environmental Considerations
Environmental regulations differ for an offshore or onshore production facility.
In offshore, the UK Pollution Prevention and Control Act of 1999 was designed to prevent and control pollution (especially spills). These regulations require that all use and discharge and disposal of chemicals at offshore oil and gas installations to be covered under a permit system.
Similar regulations in the US were implemented by the MMS (Minerals Management Service) in late 1998.
With onshore facilities, the key environmental considerations specifically related to geo-science and petroleum engineering solutions, include migration of gas to the surface along faults, improperly completed or abandoned wellbores, subsidence caused by the fluid production and declining reservoir pressures, soil and groundwater contamination resulting from historic oil and gas field operations, and emissions resulting from surface operations.
Health & Safety Considerations
Oilfield safety hazards are generally grouped into two broad categories:
- Safety and injury hazards
- Health and illness hazards
Safety and injury hazards are related to complexity of the equipment and are similar to other heavy industry locations.
One key oilfield health hazard is the presence of Hydrogen Sulfide (H2S) – characterized by an odor of rotten eggs. A very small concentration can be fatal. Employees must wear an approved breathing apparatus when their work requires them to be exposed to the gas.
In Texas, all persons working in the oil field where H2S concentrations are known must complete an annual H2S certification course.
Additionally, other toxic chemicals are present in the oilfield to treat the well for corrosion or to improve productivity. This is especially true in secondary and tertiary enhanced recovery applications.
In these situations, all employees must be educated, monitored and tested on physical and chemical properties, toxicity, concentration levels, personal protective equipment use, detection measures, rescue and first aid.
Related Resources:
What is the difference between Upstream and Downstream?
Drilling Wells for Oil and Gas and Offshore Drilling