Production Business Drivers
One of the key production business drivers operations management is the design and selection of (especially offshore) processing facilities. Accordingly, this lesson discusses the selection criteria for offshore platforms and the offshore construction industry participants that provide engineering and construction services for these multi-million dollar investments.
Lesson Overview
The Business Drivers Lesson consists of the following topics
- Learning Objectives
- Key Production Drivers or Measures
- Production Cost Basics
- EY Benchmark Study: Production costs
- EY Benchmark Study: Production Replacement Rates
- US Cost Driver Challenge: Stripper Wells
- Offshore Platform Selection Drivers
- Offshore Construction Perspective
- Offshore Construction Segments
- Offshore Services
- Subsea Equipment
- ROV: Remotely Operated Vehicle
- Shallow Water Development Systems
- Fixed Platform
- Compliant Towers
- TLP: Tension-Leg Platforms
- Deepwater Development Systems
- SPAR
- Subsea Operations
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Key Production Drivers
In today’s volatile crude price environment, E&P companies develop business strategies for several different price scenarios. Current prices are not used. An estimate is made of a long-term forward price trend for capital and expense planning.
With no control over crude prices, E&P operators attempt to control the three things that can be influenced:
- Exploration budgets and (hopefully) success rate,
- Finding and Development costs, and
- Ongoing production efficiency measured by what is termed ‘lifting costs.’
In Production Operations complexity drives cost.
The number of wells, leases, and locations is a key factor in operating costs. In addition to maximizing recovery, E&P operators want to maximize the life of the well – that is, make it produce profitably for as long as possible. These new types of wells and enhanced production techniques also add cost.
Crude prices affect production costs because power and steam are used to enhance production… generated by either oil or gas.
Finally, lifting costs have risen because the new technologies required to drill and produce from increasingly difficult areas are not cheap. Companies are now pursuing unconventional onshore reserves and operating in offshore waters as deep as 3,300 m (10,000 feet ).
Production Cost Basics
Publically reported production costs include the following:
- Lifting costs: Costs incurred in operating and maintaining wells, related equipment, and facilities used in producing petroleum liquids and natural gas. Production Operations is responsible to manage and optimize lifting costs. Lifting costs are also often called Lease Operating Expense (LOE).
- Severance taxes.
- Applicable crude oil and natural gas excise taxes and ad valorum taxes.
- Property taxes (primarily in the US).
- Depreciation, depletion, and amortization expenses – which are not included in lifting costs.
Analysts allocate production costs between oil and gas using relative production weightings, with oil today generally receiving a greater share of the cost. Note that:
- Liquids are normally more expensive to produce and process (at the field level) than an equivalent amount of gas. Thus, a relatively high proportion of gas production will tend to lower overall operating costs.
- As high cost shale gas and other unconventional gas supplies become more important this factor may change.
- A disproportionate amount of heavy oil will skew average costs towards the high end.
Production Cost Statistics
Production cost statistics differ depending on whether an E&P operator is primarily an oil producer or a gas producer.
For an oil company costs are reported on a BOE basis, called Barrel of Oil Equivalent, where natural gas production is converted to barrels at a ratio of 6 Mcf to one barrel of oil.
For a gas company costs are reported on a MCFE basis, called MCF of Gas Equivalent, using the same conversion factor.
US Cost Driver Challenge – Stripper Wells
In the US, marginal, low-volume oil and natural gas “stripper” wells contribute significantly to the nation’s energy supply. The continued importance of the stripper well system adds significantly to the cost of production field operations and accounting.
Marginal oil is produced from low-volume wells, defined as those wells producing 10 barrels of oil per day or less. In 2006, these wells contributed nearly 18% of oil produced in the US, as reported by the US Stripper Well Consortium (SWC).
Why continue to produce from such small-volume wells? While each stripper well contributes only a small amount of oil (2.18 barrels a day, on average), there are over 400,000 stripper oil wells in the US. These marginal wells produced more than 335 million barrels of oil in 2006.
Marginal natural gas is produced from a low-volume “stripper” well, defined as a gas well that produces only 60 thousand cubic feet (MCF) per day or less. There are almost 300,000 gas stripper wells in the US.
Marginal gas wells represented nearly 9% of domestic US natural gas production in 2006.
Offshore Platform Selection Drivers
Offshore platforms are the largest capital investment component of Production Operations and can run into hundreds of millions of dollars.
The difficulty with selection of the platform for a given offshore field is that neither the extent of the reservoir nor production rates are accurately known. So engineering estimates usually include a lot of latitude and “cushion” built into them.
On the other hand, space on a platform is very precious and every pound of weight costs a lot of money. Over-investment in one piece of equipment takes away from needed space for another.
With this in mind, the key factors that drive selection and design of an offshore platform are as follows:
- Water depth.
- The metaocean data (wave height, storm patterns,etc).
- Field size, geographic dispersion and production rate.
- Completion and riser design:
- Dry completion on the platform is the best.
- Wet completion on the seabed is much more complicated.
There are many types of offshore production platforms ranging from fixed (anchored) to free-floating and each type is a direct result of the offshore conditions.
The various types of platforms are discussed later in this lesson.
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Offshore Construction Perspective
The activity and financial health of the offshore construction industry depends on the capital expenditures of oil and gas companies and foreign governments’ appetite for offshore projects. These expenditures are influenced by the:
- selling price of oil and gas,
- cost of production and delivery,
- terms and conditions of offshore leases,
- discovery rates of new offshore reserves, and
- local and international political and economic conditions.
In the 80’s and 90’s, none of these factors were very positive. Many firms in the offshore construction industry struggled to stay in business and keep experienced technical, engineering and construction personnel.
Today there is a shortage of skilled staff and materials to deliver offshore projects.
One of the key drivers of success for an E&P operator to bring an offshore production project to completion is to select the right contactor and negotiate an agreement that is fair to both parties.
Offshore Construction Segments
Today, the offshore construction industry can be divided into three categories:
- Engineering and construction contractors that design and build the massive production facilities described later in this lesson;
- Offshore service contractors that supply transportation, materials and technical services to production platform operators; and,
- Subsea equipment and service contactors that specialize in design, fabrication, installation and maintenance of any facilities on the seabed.
To clarify some of the terminology:
- E&C means (Engineering & Construction) contractors.
- EPC means (Engineering, Procurement and Construction) contactors.
- EPIC means (Engineering, Procurement, Installation and Construction) Contactors.
Most large firms do some or all of the functions, as requested by the E&P operator. The services provided depend on the location and engineering complexity of the project, and the internal capabilities of the operator.
Offshore Services
To reduce costs, E&P operators began outsourcing operations and maintenance (O&M) for offshore platforms in the early 1990’s. The number of offshore platforms drives this market, especially the Gulf of Mexico and the North Sea.
Within any given region, O&M contracting spans a wide variety of services, ranging from the simple provision of (hourly) platform staff to providing full turnkey platform production operations service.
Two other major services are also provided by Offshore Services contactors to offshore platforms:
- Helicopter transportation is provided to the platforms, primarily to move personnel, and to a lesser extent parts and equipment. According to the 2003 Oil and Gas Producers’ Forum Worldwide Report, about a million hours are flown by helicopters for the petroleum industry each year and 90% of this flying is offshore. In that million hours there are 3 million flights and 10 million passengers.
- Tugs and supply vessels are used to support both drilling and production operations, including transporting equipment and personnel, towing drilling rigs, positioning anchors and other marine support services. Vessels differ in size, power, and equipment to fit a particular application, including large heavy-lift equipment to install deepwater offshore platform facilities.
Subsea Equipment
As shown in the chart, several types of equipment comprise a subsea production system, including: templates, wellheads, production manifolds, umbilical cable, control systems, and flow lines.
The equipment for any one project is often designed and built by a variety of sophisticated, global manufacturers. No one firm offers all the manufacturing or installation services for these complex projects.
Engineering firms and equipment vendors commonly form alliances to bid on and perform work on a project-by-project basis.
EPIC (engineering, procurement, installation and construction) contractors are commonly used to install these subsea production systems.
Remotely Operated Vehicle (ROV)
A Remotely Operated Vehicle (ROV) is a mobile tool for use in deepwater environments too dangerous or costly for divers. The current maximum working depth of most ROV technologies is 3,000 m (10,000 feet). While the oil and gas industry uses the majority of ROVs’ other applications include science, military and salvage.
The best way to describe an ROV is that it is a remotely controlled submarine. Over the last 10 years, ROVs have made very strong inroads into the traditional areas of work done by divers. Norway is at the forefront of displacing divers from their traditional role to having ROVs perform all the underwater tasks required for subsea installations, operations and maintenance.
At a minimum an ROV consists of a camera and a two-way communications mechanism allowing the pilot to control it from the surface. Sophisticated ROV vehicles now carry additional tools, such as manipulators, scientific instruments and specialized cameras to accomplish complex repairs on the seabed.
Shallow Water Development Systems
Shallow water development systems include four basic types of anchored production facilities:
Fixed platforms
- Normally a steel or concrete jacket with deck on top
- Economically feasible in depths to 515 m (1,700 feet)
- very common in the Gulf of Mexico.
Compliant towers
- A narrow, flexible tower in a piled foundation
- Designed to sustain large lateral forces
- Used in water depths between 300m and 600m (1,000 and 2,000 feet)
Tension Leg Platforms (TLPs)
- A floating platform structure held by tensioned tendons
- Applies in a broad water depth range – with depths approaching 1,200 m (4,000 feet)
Mini Tension Leg Platforms (Mini-TLPs)
- A floating mini-tension platform of low cost
- Often used as a utility, satellite or early platform for larger deepwater discoveries
Fixed Platform
Fixed platforms are built on concrete and/or steel legs anchored directly onto the seabed, supporting a deck with space for drilling rigs, production facilities and crew quarters. Such platforms are, by virtue of their immobility, designed for very long term use.
Two major types of structure are used; steel jacket, and concrete caisson.
- Steel jackets are vertical sections made of tubular steel, and are usually piled into the seabed.
- Caisson structures are made of concrete poured into steel forms. They often have built-in oil storage tanks below the sea surface. These tanks are often designed to float, allowing them to be built close to shore and then floated to their final position where they are sunk to the seabed.
Fixed platforms are economically feasible for installation in water depths up to about 520 m (1,700 feet).
Compliant Towers
Compliant towers are fixed rig structures normally used for the offshore production of oil or gas. The rig is constructed of narrow, flexible (compliant) towers and a piled foundation that supports a conventional deck for both drilling and production operations.
Compliant towers are designed to sustain significant lateral deflections and forces (applied by rough seas and high winds), and are typically used in water depths ranging from 450 and 900 m (1,500 and 3,000 feet).
With the use of flexible elements in the legs and axial tubes, wave resonance is reduced and de-amplified. This type of rig structure can be configured to adapt to existing fabrication and installation equipment. The production risers are conventional and are subjected to lower structural loads and flexing than floating production systems.
Tension-Leg Platforms
Tension-leg platforms are vertically-moored floating structures normally used for the offshore production of oil or gas, and are particularly suited for water depths greater than 300 m (about 1,000 feet).
The platform is permanently moored by means of tethers or tendons grouped at each of the structure’s corners.
A group of tethers is called a tension leg. A feature of the design of the tethers is that they have relatively high axial stiffness and virtually all vertical motion of the platform is eliminated.
This allows the platform to have the production wellheads on deck (connected directly to the subsea wells by rigid risers), instead of on the seafloor. This well completion design is cheaper and gives better control over the production from the oil or gas reservoir.
Deepwater Development Systems
Deepwater development uses four types of floating production facilities as shown in the chart.
SPAR’s
- Large-diameter, single vertical cylinder supporting a deck
- Fixed platform topside
- used in up to 915m (3,000 feet) of water depth
FPS – Floating Production Storage
- A semi-submersible unit
- Equipped with production and drilling facilities
- Anchored in place
- used in 180to 2,300m (600 to 7,500 feet) water depths
Subsea completions
- single subsea wells or multiple well completions
- water depth is greater than 1,500m (5,000 feet)
FPSO – Floating Production Storage & Offloading
- Multiple, connected platforms
- A large tanker vessel moored to the seafloor
- Tanker transports the oil to shore
SPARs
Historically, SPARs (Seagoing Platform for Acoustic Research) were used as marker buoys, for gathering oceanic data and for oil storage. Today, SPARs are used for drilling, production, or both. The distinguishing feature of a SPAR is its deep-draft hull, which produces very favorable wave management characteristics compared to other floating hull designs.
A SPAR platform consists of a large-diameter, single vertical cylinder supporting a deck. It contains a deep-draft floating caisson, which is a hollow cylindrical structure similar to a very large buoy. Its four major systems are hull, moorings, topsides, and risers. About 90% of the structure is underwater.
SPAR production platforms have been developed as an alternative to conventional offshore platforms, are prevalent in the Gulf of Mexico, and they are typically used in very deep waters, greater than 1520m (5,000 feet).
Subsea Operations
Subsea is a general term commonly used to refer to equipment, technology and methods employed to produce oil and gas fields that exist on the ocean floor. This could either be in shallow or (more often) in deepwater.
The subsea oil and gas industry requires very specialized equipment. The equipment must be durable and reliable enough to safeguard the environment, and make the exploitation of the subsea hydrocarbons economically feasible.
Subsea systems are commonly used:
- In deep water, where a platform structure becomes cost (or technology) prohibitive.
- At isolated fields – it is becoming increasingly popular to develop fields with subsea trees tied back to a common point for a pipeline-to-shore (like the Independence Hub in the Gulf of Mexico) or use a floating production system.
- Where the reservoir is large and homogeneous, and the wells require few re-entry services, such as re-completions or work-overs.
Related Resources:
What is the difference between Upstream and Downstream?
Drilling Wells for Oil and Gas and Offshore Drilling