Petroleum Economics PAB3023

EXPENSES & RISK

By: Dr. Ismail M. Saaid

Reference: Acknowledgement Prof. L.F. Koedritz, UMR 1992

Learning Outcomes
 To identify components of expenses
 To classify types of risks
 To calculate risks
 To analyze decision tree method
 Expenses
Drilling and completion are the biggest & main initial
costs/investment in upstream activities.

 Dry Hole Cost

Cost of Preparing the drill site, drilling contract, mud, surface
casing, cement, logs, Drillstem Test (DST) etc

 Completion Cost
Casing, packers, tubing, perforating, fracturing, chokes etc
 Expenses
If we consider to drill 10 wells, 4 wells being dry holes and 1.2
wells being lost on completion, our total expenses will be:-
Dry hole cost
4 x $ 250k = $ 1000k
1.2 x ($100k +$ 250k) = $ 420k Lost on
completion
4.8 x ($100k +$ 250k) = $ 1680k
Total = $ 3100k “successful
wells”
So, the $ 3100k must be recovered by the 4.8 producing wells,
$3100k / 4.8 = $654.83k
 Expenses
 What the difference means?
($ 645.83k – $604.17k = $41.66k)
 Due to the fact that we allocated some of the drilling risk to wells that
could not be completed. $ 41.66k is the additional drilling risk which
maybe also be calculated from:-

(1- CFc ) adr = additional drilling risk

adr = dr x CFc = chance factor completion
CFc
 Expenses
(1- CFc ) adr = additional drilling risk
adr = dr x CFc = chance factor completion
CFc

= $166.67k x ([1 – 0.8] / 0.8) = $ 41.66k

Additional
Drilling Risk Drilling Risk

Thus, the total drilling risk = $166.67k + $41.66k

= $208.33k
 Expenses
total risk (tr) = total drilling risk (dr) + completion risk (cr)

1  CFd   1  1  CFc 
 dhc     cc  dhc  
 CF d  d 
CF  CF c 
dhc(1  CFd )  (cc  dhc)(1  CFc )(CFd )

CFd CFc
= 250 (1-0.60) +(100+250)(1-0.80)(0.60)

(0.60)(0.80)
= 295.85 k$
 Expenses
• Note that many projects require more than one chance factor
• For logical decisions, need to evaluate both chance factors and
reserves.

 composite chance factor Described by a

 composite reserves “decision tree” method