Economics and Resource Appraisal - The Case of the Permian Basin

Abstract

Summary Estimates of oil and gas resources typically are presented in terms of proved and undiscovered resources. This paper presents a methodology for incorporating economic considerations into resource appraisals for petroleum basins. A cost algorithm is used to calculate estimates of the costs of finding and developing undiscovered oil and gas fields in the Permian basin. The sensitivity of the resource estimates to variations in values of the variables in the costing model was investigated, and the results of this analysis are presented. The model indicates that at prices up to $40/bbl, the total reserves of oil and gas in barrels-of-oil equivalent (BOE's) from future discoveries will be less than 15% of the estimated ultimate recovery from fields discovered before Jan. 1 1975. Only discoveries to a depth of 20,000 ft were included. Introduction Estimates of both discovered and undiscovered oil and gas resources rarely are accompanied by estimates of the expected costs of finding and producing the resources. The assumption is inherent in most resource estimates that all or most resources estimated are presently economically recoverable or will be so under future economic and technological conditions. However, unless fields are of sufficient size, they will not be developed. Ideally, any estimate of potential (undiscovered) oil and gas reserves should include an estimate of the costs that would be incurred in producing them. Once these costs are established, the quantity of the undiscovered resources that can be found and produced at a given price can be predicted. In this paper, we present a model for calculating the undiscovered potential reserves and associated exploration, development, and production costs for the Permian basin as a function of price and rate of return. First, the methodology is outlined broadly, and then results of a sensitivity analysis of critical physical and economic variables used in the model are presented. This paper is concerned with only those undiscovered potential reserves to a depth of 20,000 ft in fields to be discovered after Dec. 31, 1974. The location of the Permian basin is shown in fig. 1. Methodology The cost algorithm uses predictions of the size and depth distributions of fields that will be discovered. The economic feasibility of developing a typical or representative field for a specific size and depth class for any given wellhead price and assumed rate of return is determined by carrying out a discounted-cash-flow (DCF) analysis. The net after-tax cash flow consists of revenues from the production of oil and/or gas minus the operating costs, capital costs in the year in which they are incurred, and taxes. All fields of a particular size and depth class are assumed to be developed if a representative field is economic. A representative field is developed if the after-tax DCF for a well, representative of the field, is equal to or greater than zero. For any price and assumed rate of return, the calculated reserves of newly discovered economical fields are aggregated to provide an estimate of potential reserves for fields in the basin. Distributions by size and depth classes of undiscovered fields as of Jan. 1, 1975, are predicted for successive increments of exploratory drilling by using a discovery-decline extrapolation model.