Comprehensive Energy Price Model Including Deepwater Drilling Risk
- Hadi Arbi Belhaj (The Petroleum Institute) | G.F. Terry Lay (Vineland Electronics Ltd.) | Laura J. Lau (The Petroleum Institute) | Richard Arthur Lau (The Petroleum Institute) | Khulud Mustafa Rahuma (Al-Fateh University)
- Document ID
- Society of Petroleum Engineers
- Brasil Offshore, 14-17 June, Macaé, Brazil
- Publication Date
- Document Type
- Conference Paper
- 2011. Society of Petroleum Engineers
- 4.1.5 Processing Equipment, 7.1.5 Portfolio Analysis, Management and Optimization, 4.6 Natural Gas, 5.7.5 Economic Evaluations, 6.6.2 Environmental and Social Impact Assessments, 2.1.7 Deepwater Completions Design, 5.7 Reserves Evaluation, 4.1.2 Separation and Treating, 7.1.10 Field Economic Analysis, 4.5 Offshore Facilities and Subsea Systems, 6.5.5 Oil and Chemical Spills, 7.1.9 Project Economic Analysis, 1.14 Casing and Cementing, 4.1.9 Heavy Oil Upgrading, 1.10 Drilling Equipment, 1.6 Drilling Operations
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Relying solely on traditional drilling technology to estimate the world's proven Oil Reserves denies the likelihood that billions of barrels of unfound oil lay just outside the industry's technological reach. With substantial financial and legal assistance and government support to develop newer technologies like Deep-Water Drilling (DWD), the major oil companies and the US White House are confident that new fields can be brought into production that should increase supplies and stabilize or lower energy prices. Each new find, they estimate, will help increase the world's proven oil reserves allowing investors and consumers to feel more optimistic about providing for their future energy needs. It is also hoped that this new technology will lead to safer, more economic and environmentally appealing exploration and production methods (Belhaj, et al)1.
Pertinent questions arise as to what impact BP's tragic oil spill may have on the future of Deep-Water Drilling and on the future of energy prices? Does industry have the technology to successfully and economically exploit fields using DWD? What role should governments play in regulating dangerous, environmentally unsound drilling practices? Should regulations be allowed to impede progress?
Identifying DWD as having a major influence on cost and being a critical parameter in any energy equation, the authors answer these questions and present two models that pessimistically and realistically describe the future role of DWD in places like China, India and Brazil over the next 50 years - places with growing populations and economies, but little government oversight.
Conclusions are reached with a discussion about the need for DWD in the current economic slowdown in advanced economies that have witnessed decreased oil demand and why traditional models affecting energy prices have been unsuccessful in predicting the current high energy prices.
Modeling of energy prices is a basic necessity for predicting prices in order to realistically project a NCF (Net Cash Flow) profile for any petroleum project. Unfortunately, to-date, no existing model can pragmatically meet this requirement. Efforts are still focused on hopes achieving this goal. Generally, NCF calculation parameters include; estimated reserves, OPEX (Operating Costs), CAPEX (Capital Costs), discount rate, royalty and oil price. Valuing real options of oil price or project volatilities, net convenience yield, time to option expiration or other modeling parameters extend the list of input data. All these factors affect NCF of the project unequally. Sensitivity analyses quantify the influence of these values on the project economics (Campbell, Campbell, and Campbell2 and Olsen et al3 ) and confirm that oil price affects the result of any petroleum industry project appraisal more than any other input parameter. This supports the efforts to establish a realistic and representative oil price model to project future oil prices.
Causes for the rapid rise in the price of crude oil between 2004 and the summer of 2006 have been a subject of debate. Some of it focuses on changes in the so-called downstream sector; especially the refining sector. The number of refineries in the United States has not increased since 1981 (Annual Energy Review, 2006)4, and in the spring of 2007, a significant fraction of refining capacity was closed due to unscheduled maintenance. Under these conditions, a lack of spare refining capacity is seen as one cause for the ongoing rise in the price of motor gasoline and crude oil. Other factors proposed to explain the sharp rise in oil prices include the lack of sufficient spare production capacity and a non-linear relationship between oil prices and supply. Finally, expectations of shortages in the long-run may also influence oil prices.
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