Third Edition

Petroleum Economics
and Engineering

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Third Edition

Petroleum Economics
and Engineering
Edited by

Hussein K. Abdel-Aal
Mohammed A. Alsahlawi

Boca Raton London New York

CRC Press is an imprint of the

Taylor & Francis Group, an informa business

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CRC Press
Taylor & Francis Group
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Contents

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Preface..................................................................................................................... vii
The Editors...............................................................................................................xi
Contributors.......................................................................................................... xiii

Section 1 Introduction to the Oil and Gas Industry

1. World Oil and Gas Supply and Demand....................................................3
M.A. Al-Sahlawi
2. Structure of the Oil and Gas Industry...................................................... 21
M.A. Al-Sahlawi
3. Characteristics of Crude Oils and Properties of Petroleum
Products........................................................................................................... 41
Saad Al-Omani

Section 2 Principles, Methods, and Techniques of

Engineering Economics Analysis
4. Time Value of Money (TVM) in Capital Expenditures......................... 69
M. Bassyouni
5. Depreciation and Depletion in Oil Projects............................................ 93
Shereen M.S. Abdel-Hamid and Faheem H. Akhtar
6. Financial Measures and Profitability Analysis..................................... 117
Maha Abd El-Kreem
7. Analysis of Alternative Selections and Replacements........................ 139
Khaled Zohdy
8. Risk, Uncertainty, and Decision Analysis.............................................. 161
Jamal A. Al-Zayer, Taqi N. Al-Faraj and Mohamed H. Abdel-Aal
9. Break-Even and Sensitivity Analysis...................................................... 181
Taqi N. Al-Faraj
Jamal A. Al-Zayer
v

vi

Contents

10. Optimization Techniques.......................................................................... 197

Jamal A. Al-Zayer, Taqi N. Al-Faraj and Mohamed H. Abdel-Aal

Section 3 Applications and Case Studies

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11 Exploration and Drilling............................................................................225

Hussein K. Abdel-Aal
12 Reserves and Reserve Estimate................................................................ 243
K.A. Al-Fusail (Deceased)
13 Production Operations............................................................................... 261
Mohamed A. Aggour and Hussein K. Abdel-Aal
14 Gas-Oil Separation...................................................................................... 271
Hussein K. Abdel-Aal
15 Crude Oil Treatment: Dehydration, Desalting, and Stabilization.... 283
Hussein K. Abdel-Aal and Halim H. Redhwi
16 Gas Treatment and Conditioning............................................................. 295
Hussein K. Abdel-Aal and H.H. Redhwi
17 Crude Oil Refining: Physical Separation............................................... 307
Hussein K. Abdel-Aal and Gasim Al-Shaikh
18 Crude Oil Refining: Chemical Conversion............................................ 325
Abdullah M. Aitani
19 Natural Gas Processing: Recovery, Separation, and
Fractionation of NGL (Natural Gas Liquids).........................................345
Mazyad Al Khaldi
20 Oil and Gas Transportation....................................................................... 355
M.A. Al-Sahlawi
Bibliography......................................................................................................... 391
Appendix A: Conversion Factors..................................................................... 399
Appendix B: Compound Interest Factors ...................................................... 407
Index......................................................................................................................443

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Preface
Technology and economics are two areas that have the capacity to transform our world. Petroleum technology from the engineering point of view is
subject of this book, along with economic analysis. Technology is the great
enabler that has made exploration for oil more effective, drilling more efficient, and production more prolific, safer, and less intrusive to the environment than ever.
The application of engineering principles to practical ends such as the
design, manufacture, and operation of efficient and economical plants,
machines, and processes exemplifies the leading role of technology in the
petroleum sector. The largest volume products of the industry are fuel oil
and gasoline. Petroleum is also the raw material for many chemical products, including pharmaceuticals, solvents, fertilizers, pesticides, and plastics.
In oil production, virtually every oil field decision is founded on profitability. With no control of oil and gas prices and facing steadily rising costs and
declining reserves, companies basic decisions are based on constantly moving targets. Drilling, completing, and producing oil and gas is an extremely
complex business. One might think that the worlds unshakable thirst for
cheap, abundant energy resources makes profitability a sure thing, but this
might not be so.
Petroleum economics and engineering is the application of economic techniques and analysis to the evaluation of design and engineering alternatives
encountered in the petroleum industry. It includes the systematic evaluation
of the economic merits of proposed solutions to engineering problems. Part
of the role of petroleum economics and engineering is to assess the appropriateness of a given project, estimate its value, and justify it from an engineering standpoint.
The philosophy in this book is the same as in previous editions in that
the fundamentals of economics as applied to engineering problems in the
petroleum industry are emphasized. The text focuses on the fact that engineers seek solutions to problems; the economic viability of each potential
solution is considered along with its technical merits. This is typically true
for the petroleum sector, which includes the global processes of exploration,
production, refining, and transportation (often by oil tankers and pipelines).
Fully revised and updated to reflect major changes over the past two
decades, this third edition offers thorough coverage of every sector in oil
operations, focusing on engineering problems encountered in the oil industry. Sound economic decision making to solve these problems is the main
target of the book. Section 1 consists of introductory materials. All principles, methods, and techniques of engineering economics (as applied to the
petroleum industry) are presented in Section 2.
vii

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viii

Preface

An eminent group of contributors, in addition to the editors of the book,

wrote chapters for which they are specially qualified and possess valuable
experience. The books twenty chapters are arranged in three parts.
Section 1, Introduction to the Oil and Gas Industry, consists of three chapters. World petroleum and gas supply and demand patterns are examined in
Chapter 1. The activities and structure of the oil and gas industry are examined in Chapter 2. Chapter 3 provides information about the different types
of crude oil, the composition of natural gas, and the properties of petroleum
products.
Section 2, Principles, Methods, and Techniques of Engineering Economics
Analysis, is the backbone of the book. Economic principles are revised and
presented in this new edition. This part consists of seven chapters. Chapter
4 is concerned with interest and time relationships; Chapters 5 through 7
are devoted to the calculation of depreciation and depletion costs, profitability analysis, and comparison of alternatives and replacements, respectively.
Risk evaluation and decision analysis, breakeven and sensitivity analysis,
and optimization techniques are covered in Chapters 8 through 10. Many
examples are worked out in this part using Excel.
Section 3, Applications and Case Studies, covers the hydrocarbon industry.
It treats in chronological order the three major components that characterize
the oil industry:
The upstream component including all subsurface operations
The midstream component, known as surface petroleum operations
The downstream component, known as refining/processing operations
Section 3 consists of ten chapters. Technology aspects and engineering
background are described first in each chapter, followed by selected case
studies with applications to demonstrate how to apply economic analysis
for many engineering problems encountered in various sectors of petroleum
operations. Chapters 11 through 13 handle upstream (subsurface) operations, covering exploration and drilling, reserves and reserve estimates, and
production, respectively. Chapters 14 through 16 deal with midstream (surface) operations, covering gas/oil separation, crude oil treatment, and gas
treatment and conditioning, respectively. Chapters 17 through 20 are concerned with downstream operations (refining/processing), covering crude
oil refining by physical separation and chemical conversion, gas processing,
and transportation of oil and gas, respectively.
The techniques of economic analysis employed throughout the text are
used to the fullest extent, and details are carefully presented, covering
each sector of the oil industry. Many application examples are included to
illustrate various theoretical solutions.
The purpose of the book goes beyond description and systematization
of economic problems in oil engineering. Engineers and managers may

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Preface

ix

combine principles drawn from the chapters to solve problems and evaluate
oil economic projects of which they are in charge.
The economic principles and techniques covered in Section 2, in combination with the technological descriptions of different phases encountered in the
oil industry and the illustrative examples and case studies in Section 3, impart
the required skills for effective economic evaluation of most practical oil engineering problems. In addition, concepts and techniques of analysis useful in
evaluating the worth of petroleum systems are considered. The answers to frequently asked questions such as which petroleum projects are worthwhile?
and which project should have a higher priority? are presented.
This book is invaluable to senior and graduate students majoring in
petroleum engineering, chemical engineering, and economics. It is a helpful resource for practicing engineers and production people working in the
petroleum industry who have the responsibility of planning and decision
making in oil or gas field development. It also may be used as a reference
volume for managers, executives, and other personnel engaged in this field.
Although the book is focused on petroleum engineering economics, most
of its contents should be equally applicable to other engineering disciplines.
The text can be adopted, accordingly, as a principal or supplemental resource
book in allied courses such as engineering economics, petroleum economics
and policy, project evaluation, and plant design.
Since all aspects of the field of engineering economy in the petroleum industry cannot be covered in detail in a single book, every effort has been made by
the editors and the authors to expose the readers to the nature of the problems
that are typical of the oil industry. This book by no means presents a complete
description of the design of any part of these processes. Many details have
been omitted in order to summarize a vast subject. Errors of exposition and
inelegances of expression undoubtedly remain. These are our responsibility.
References are grouped together at the end of the book to serve as a subject bibliography. They do not represent complete citation of the authorities
for all the statements given in the text. Conversion factors are included in
Appendix A, and Appendix B lists the economic factors as a function of the
interest rate and the number of years that are used extensively in Section 2.
We are pleased to acknowledge the help we have received over the years
from colleagues and students, and in particular from established sources
and texts on the same topic. We are greatly indebted to the many firms and
publications that have allowed us to use their materials as references.
The editors are grateful to Taylor & Francis Group for their enthusiasm
in the publication of this new edition of our book. It is our pleasure to
acknowledge the help provided by Allison Shatkin, Jill Jurgensen, and Amy
Rodriguez throughout this task.
Hussein Abdel-Aal
Mohammed Alshlawi

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The Editors
Hussein K. Abdel-Aal is Emeritus Professor of Chemical Engineering and
Petroleum Refining, National Research Centre (NRC), Cairo, Egypt, and
King Fahd University of Petroleum and Minerals (KFUPM), Dhahran, Saudi
Arabia. Abdel-Aal received his B.S., Chem. Eng., in 1956 from Alexandria
University, M.S. and Ph.D., Chem. Eng., in 1962 and 1965, respectively, from
Texas A&M University.
Abdel-Aal worked in the oil industry (19561960) as a process engineer
in Suez oil refineries before doing his graduate studies in the United States.
On returning to Cairo, he joined NRC for the period 1965 to 1970, followed
by one year at University of Manchester Institute of Science and Technology
(UMIST), United Kingdom, as a postdoctoral scholar.
He then joined the Department of Chemical Engineering at KFUPM,
Dhahran, Saudi Arabia (19711985). He was the head of the department from
1972 to 1974 and was a visiting professor with the Chemical Engineering
Department at Texas A&M from 1980 to 1981. From 1985 to 1988, Abdel-Aal
assumed the responsibilities of the head of the Solar Energy Department,
NRC, Cairo, before rejoining KFUPM again from 1988 to 1998.
Abdel-Aal has contributed to over 90 technical papers and is the editor of
Petroleum Economics and Engineering and the main author of Petroleum and Gas
Field Processing (Marcel Dekker, New York, 1992 and 2003, respectively).
Abdel-Aal is listed in Whos Who in the World, 1982, is a member of the
American Institute of Chemical Engineers (AIChE), Sigma Si, and Phi
Lambda Upsilon. He is Fellow and founding member of the board of directors of the International Association of Hydrogen Energy, Miami, Florida.
Mohammed A. Alsahlawi is Professor of Economics and Energy Economics,
Department of Finance and Economics, College of Industrial Management,
King Fahd University of Petroleum and Minerals (KFUPM), and previous
dean of the College of Industrial Management. He holds a Ph.D. in economics
from the University of Wisconsin (1985), B.S. in chemical engineering (1978),
and an MBA (1980) from KFUPM, Saudi Arabia. In 1985 he was the director of
the Economic and Industrial Research Division, Research Institute, KFUPM.
Alsahlawi was the director of the Organization of the Petroleum Exporting
Countries (OPEC) Information Department and OPEC News Agency from
1991 to 1995, and was a member of the advisory board of the Saudi Arabian
Supreme Economic Council from 1997 to 2002. He established and was the
director of the Human Resources Development Fund (HRDF) from 2001 to
2006. Alsahlawi serves on several editorial boards of international journals
in energy economics and business economics, and his publications have
appeared in several energy economics journals.
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Contributors

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Hussein K. Abdel-Aal
National Research Center
Cairo, Egypt
Mohamed H. Abdel-Aal
King Abdullah University of
Science and Technology
Thuwal, Saudi Arabia
Shereen M.S. Abdel-Hamid
Higher Technological Institute
Tenth of Ramadan, Egypt
Maha Abd El-Kreem
Higher Technological Institute
Tenth of Ramadan, Egypt
Mohamed A. Aggour
Texas A&M University at Qatar
Doha, Qatar
Abdullah M. Aitani
King Fahd University of Petroleum
and Minerals
Dhahran, Saudi Arabia
Faheem H. Akhtar
King Abdulaziz University
Rabigh, Saudi Arabia
Taqi N. Al-Faraj
King Fahd University of Petroleum
and Minerals
Dhahran, Saudi Arabia
K.A. Al-Fusail (Deceased)
King Fahd University of Petroleum
and Minerals
Dhahran, Saudi Arabia

Mazyad Al Khaldi
Saudi Arabia Basic Industries
Corporation (SABIC)
Dhahran, Saudi Arabia
Saad Al-Omani
Saudi Aramco
Dhahran, Saudi Arabia
M.A. Al-Sahlawi
King Fahd University of Petroleum
and Minerals
Dhahran, Saudi Arabia
Gasim Al-Shaikh
PCMC, Petroleum, Chemicals &
Mining Company Limited
Jubail, Saudi Arabia
Jamal A. Al-Zayer
King Fahd University of Petroleum
and Minerals
Dhahran, Saudi Arabia
M. Bassyouni
King Abdulaziz University
Rabigh, Saudi Arabia
and
Higher Technological Institute
Tenth of Ramadan, Egypt
Halim H. Redhwi
King Fahd University of Petroleum
and Minerals
Dhahran, Saudi Arabia
Khaled Zohdy
Higher Technological Institute
Tenth of Ramadan, Egypt
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