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Modeling the operating costs for petroleum exploration and development

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DOI: 10.1016/j.energy.2012.02.006

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 Energy 40 (2012) 189e195

Contents lists available at SciVerse ScienceDirect

Energy
journal homepage: www.elsevier.com/locate/energy

Modeling the operating costs for petroleum exploration and development

projects
Dongkun Luo, Xu Zhao*
The School of Business Administration, China University of Petroleum-Beijing, 18 Fuxue Road, Changping, Beijing, China

a r t i c l e i n f o a b s t r a c t

Article history: Since the operating cost is among the most sensitive factors to uncertainties in economic evaluation of
Received 23 September 2011 petroleum exploration and development projects, scientific prediction of the operating cost plays an
Received in revised form important role in accurately evaluating the viability of projects. This paper establishes the operating cost
10 January 2012
prediction model based on production decline law and learning curves through analyzing the impact of
Accepted 2 February 2012
resource depletion and technological advances on unit operating cost. This analysis quantifies the effects
Available online 4 March 2012
of both learning and depletion on operating costs, and also introduces an assessment of the economic
limit of stimulation treatments, which is set by comparing the unit operating cost before and after the
Keywords:
Operating cost prediction
treatments are taken. The results show the effect of resource depletion overwhelming that of techno-
Production decline logical advances for a single oilfield, and thus the operating cost is increasing over its life cycle. The
Composite decline rate influence of each parameter on the operating cost is examined, the unit operating cost in plateau phase
Learning curves having the largest influence. Over time, the effect of constant decline rate of the exponential decline is
Petroleum exploration and development gradually overtaking that of unit operating cost. This model is applied in several oilfields in Tunisia, and
projects all the exam results meet accuracy requirements.

2012 Elsevier Ltd. All rights reserved.

1. Introduction models on relationship between operating cost and time based on

The operating cost is incurred over the process of operating and
maintaining various kinds of oil and gas wells as well as related
equipment facilities, and it synthetically reflects the resource
quality, level of exploration and development, effectiveness of
technology and operating management. The existing prediction
methods of operating costs can generally be divided in two cate-
gories, one of which uses mathematical models based on history
data of operating costs. Operating cost was affected by several
factors consisting of the reservoir geology, development plan,
mining technology and management environment. All those factors
formed a complex gray system [1]. Meanwhile, due to the fact that
unit operating cost data is related to time-dependent variation
which implies exponential form, Zude Yu [2], Guanghua Zhang [3]
and Yiming Guo [4] adopted GM (1, 1) model to predict unit oper-
ating cost. Dieter Beike and Mark H. Holtz [5] established regression
model of operating costs with the oil price in time series trends
being the only independent variable for three different depth
intervals in West Texas and South Texas. Trend analysis was
introduced in several oilfields [6] by establishing linear or nonlinear
* Corresponding author. Tel.: þ86 10 8973 3072; fax: þ86 10 6974 8024.
E-mail address: zx_1210d@hotmail.com (X. Zhao).
history cost data. The prediction methods above only use the trend
of history data to reflect the variation of the operating cost.
However, it takes no account of the technical factor that affects
costs, and cannot catch operating cost variation at root either. At
the same time, the effect of the new technology and new methods
that can reduce costs would not be included into prediction models.
As of historical cost itself, the record may simply be inaccurate,
which may lead to erroneous conclusions. The other prediction
methods of operating costs forecast by the cost drivers. Bin Zhang
[7] divided the relationship between the production costs and
technical factors into linear and nonlinear, and performed fuzzy
prediction respectively using the production dynamic data as
independent variable and the cost as dependent variable. Wu Chen
et al. [8] classified operating costs according to their impact factors,
and established the model associated with water ratio for the basic
operating costs and oil and gas processing fee with regression, and
predicted other operating costs by unit cost quota. Jinshan Zhang
[9] adopted time series correlation to analyze operating cost
associated with development indicators, and fitted to establish the
models. M.E. Bradley and A.R.O. Wood [10] used cost drivers con-
sisting of production and well count as well as fixed costs to
determine operating costs in the short term, and adopted cost
accelerator to forecast operating costs in long term with consider-
ations of price changes, plant age, capital investments, and learning

0360-5442/$ e see front matter
2012 Elsevier Ltd. All rights reserved.
doi:10.1016/j.energy.2012.02.006
190 D. Luo, X. Zhao / Energy 40 (2012) 189e195
effects and so on. Ricardo E. [11] investigated that lifting cost is the
multiplication of each cost driver, and used three techniques to
calculate exponents which represent the importance of drivers.
Mark J. Kaiser [12] infers production cost of offshore structures in
the Gulf of Mexico using regression model on relationship of
production cost and its influence factors including vintage, water
depth, distance to shore, number of structures and production
capacity etc. Detailed cost data are demanded in methods
mentioned above in order to determine the cost drivers as well as
unit fee quota. Petroleum operating cost drivers include oil well
numbers, total well numbers, liquid production, water injection
rate and oil production etc., all of which vary with specific devel-
opment plan. Therefore, only if detailed reservoir geologic infor-
mation is obtained, could we design a reasonable development
plan and estimate development indicators. The fee quota can be
determined referring to the cost data of the same or similar blocks,
taking into account the factors like location, exploitation method,
ground process, reservoir physical properties, and single well
production etc. However, there would be a significant variance to
predict the development indicators by the information in explo-
ration and conceptual design for development phase. Meanwhile,
the forecast falls short of accuracy and adds extra workload.
This paper starts from the formation of the operating cost,
investigates the effect of production decline, stimulation measures
and technological advances on operating cost, and sets up the
prediction model on the basis of production decline rule and
learning curves. Analysis of the operating cost from the perspective
of technology avoids the deviation originated from merely fore-
casting operating cost based on history data and analogy with cost
data of similar oilfield, thereby the operating cost can be precisely
predicted, and it can well underlie project evaluation and cost
control.
2. Theoretical framework
2.1. Usage of analogy
Analogy is widely used in petroleum exploration and develop-
ment, especially in new ventures. Survey from twenty-one oil
companies in six countries by Rod Sloan indicated that a significant
number of geologists and reservoir engineers believed that analogs
provided detail and insight needs for successful exploration and
development and deepened the understanding of the key param-
eters. Analogy is a valuable resource that can help geologists lower
exploration risk and reservoir engineers make the optimum
development decision [13]. Technical and economic factors
affecting the operating cost consist of geological conditions,
geographical location, reservoir properties, local market price, and
staff costs and so on. All geological, reservoir and economic
parameters above are often determined by analogy in exploration
and conceptual design stages.
2.2. Analysis of the production decline
According to the production variation rule, the oilfield devel-
opment process can be divided into three phases: build-up,
plateau and decline. In the build-up and plateau phases, produc-
tion is dependent on the designed productive capacity; the
production in decline accords with the decline rule, and the
decline curve method is generally adopted. The decline curve
method extrapolates a trend in the future, assuming that the wells
have been produced to a steady-state flow, the factors that influ-
enced the behavior of the well in the past will continue to exert
the same influence in future, and the variation out of anticipation
will not happen [14]. Three types of decline curves are commonly
used in reservoir engineering to describe the decline performance
of a well or group of wells after plateau and during steady-state:
constant percentage decline (exponential), harmonic decline and
hyperbolic decline [15]:
 Exponential: qt ¼ q0edt;
 Harmonic: qt ¼ q0(1 þ Dit)1;
 Hyperbolic: qt ¼ q0(1 þ nDit)1/n.
The mathematical formulas describing the production decline
rules include Arps decline curve, Torre KePei Cardiff decline curve,
Matthews & Leflcovits decline curve, Joshi decline curve, Logistics
decline curve and Weible decline curve etc. [16]. Demonstrated by
formula derivation and illustrated with example, Arps decline
curve is widely applied and other decline curves are special cases of
Arps decline curve with different decline exponent n [17]. When n
is equal to zero, the decline curve accords with exponential decline;
when n is 1, it is harmonic decline. Decline exponent n from 0 to 1
expands to N to þN, which enlarges the scope of application and
makes it more representative [18].
Among all kinds of decline types, the exponential decline model
is probably the most commonly used because of its less parameters,
easiness of estimate and ability to capture common well dynamics;
in the hyperbolic decline models, the production drops as a frac-
tional power of the production rate, so it is usually applied during
the later stages of the life cycle of a well; the harmonic decline is
often used to model gravity drainage or water drive mechanisms
[19].
2.3. Analysis of the operating cost variation
Petroleum has its idiosyncrasy of depletion, which means
production continuing to decline and unit operating cost gradually
increasing as development proceeds. On the other hand, like
general manufactured products, technological advances reduce
unit cost.
The operating cost varies with the resources quality and
conditions during exploration and development [20]. In the initial
stage of the exploration and development, the oil layers with
better permeability and higher saturation will be developed first
because of their better physical properties and lower production
cost. For most water flood field, the layers which can be used to
release the productive capacity are merely of low permeability,
low oil saturation, high water ratio, low grade and some thin
bedded layers, along with the deepening of the exploitation, the
rising of the water ratio and worsening of the reservoir condition.
Consequently, the difficulty of the reservoir exploration and
development increases and the unit operating cost edges up
higher. It is economically rational to exploit the low-cost, high-
quality resources before high-cost, low-quality resources [21].
Under this condition, the unit operating cost becomes higher with
less remaining reserves.
Since petroleum exploitation is a technology-intensive project,
the average production costs decrease in process with the accu-
mulation of experience and improvement of technology [22].
Learning curves can be adopted to describe the well-known
observation that technological advances and experience accumu-
lation result in costs reduction [23]. Analysts have approached this
phenomenon as technological change brought about by learning-
by-doing [24]. Experience can enhance product quality, improve
production efficiency, reduce material and labor inputs and even-
tually reduce average production costs. The learning curve
describing that the average production costs can decrease expo-
nentially with increase in cumulative production is given by
ct ¼ c0 ,Qtb .
 D. Luo, X. Zhao / Energy 40 (2012) 189e195
The operating cost based on field level is changing as a result
of two opposing forces: those that increase costs, such as
depletion, and those that reduce costs, such as technological
innovation [25]. Therefore operating cost is changing constantly
with interaction of resource depletion and technological
advances.
3. Approach
Along with the deepening of the exploration and development,
the production declines as the difficulty of oil exploitation
increases. As a result, unit operating cost increases gradually. Rich
geologic information increases people’s knowledge of reservoir,
and constant adjustment of injection process accommodates the
reservoir conditions. Operation process improvement and experi-
ence accumulation enhance working performance, so this “learning
process” reduces the unit operating cost [26]. The prediction model
of the operating cost ascertains how resource depletion increases
unit operating cost and how technological advances decreases that.
The prediction model of the operating cost in the whole production
period can be written as:
8 threshold can be set by the comparison of unit operating cost
> t
>
> c0 ,q0 ,Qtb , ; t˛n1;
ct < n1
Ct ¼ Cdt , ¼ c0 ,q0 ,Qtb ; t˛n2; (1)
c0 >
> c ,q
>
: 0 0 ,qRt ,Qtb ; t˛n3:
qNt
3.1. Production decline
Every oilfield has a unique production profile, but its production
has to go through the build-up, the plateau production and the
decline phase. The operating cost depends on the work system of
oil wells in the build-up and plateau phases, while it is related to
the production decline and the stimulation treatments in decline
phase.
3.1.1. Operating cost in build-up and plateau production phases
Taking no account of stimulation, the operating cost in its
economic life is invariant once the work system of the oil well is
finalized. The annual operating cost over its economic life can be
represented by the annual operating cost in plateau phase. The
production in the plateau phase approximately equals to the
designed productive capacity which can be calculated by predicted
proved geologic reserves and production rate. Besides, the unit
operating cost data at plateau stage is easy to obtain by analogy.
Therefore, the annual operating cost at plateau stage can be
calculated as follows.
q0 ¼ N,v (2)
Cdt ¼ c0 ,q0 ¼ c0 ,N,v; t˛n2 (3)
As oilfield facilities enter smooth operation in the build-up
phase, few repair fee and downhole operating cost are incurred.
The major expenditure is the lifting fee associated with the
production. Consequently in this stage production output and unit
operating cost in plateau phase can be used to denote the annual
operating cost. Assumed that the production increases in propor-
tion to time, the operating cost in build-up phase can be approxi-
mately denoted as Eq. (4).
t t
Cdt ¼ c0 ,q0 , ¼ c0 ,N,v, ; t˛n1 (4)
T1 T1
191
3.1.2. Operating cost in decline phase
The remaining reserves reduce gradually and the reservoir
energy depletes continually with prolonged exploitation. At that
time, increasing recovery rate and rising composite water ratio turn
the oilfield into the decline phase. In practice, to take full advantage
of the value of the productive construction investment and to
stabilize supply for downstream enterprises, stimulation treat-
ments must be deployed. For new projects, the well pattern
modification and thickening measures are not taken into account.
That is assessed separately as reinvestment [27]. Only the contri-
bution of the stimulation treatments such as fracture and acid treat
etc. are considered. The operating costs change with implement of
stimulation treatments.
Conventional approach determines economic limit of stimula-
tion treatments by comparing costs incurred and incomes gener-
ated [28]. If costs equal incomes, that is to say unit operating cost
equals price, the oilfield reaches the economical limit of stimulation
treatments. However, price fluctuates drastically and thus is hard to
predict. This brings great risks if the economic threshold of stim-
ulation treatments is determined by price.
The recovery efficiency is certain in specific technical conditions,
so should the corresponding profits. Therefore, the economic
before and after the treatments are taken. If the unit operating cost
after the measures have been taken is less than that without, the
input of the measures should be stimulated; if the former is higher
than the latter, the original operation will be kept. The unit oper-
ating cost is used to determine the stimulation threshold until the
unit operating cost after the measures have been taken is equal to
that without, and then the stimulation measures will be termi-
nated. The operating cost in the decline phase after the measures
have been taken can be written as:
Cdt ¼ cqt ,qRt ; t˛n3 (5)
(1) Unit operating cost under natural decline
Without taking stimulation measures, the operating cost is
invariant in exploitation process. The unit operating cost in decline can
be calculated using annual operating cost at plateau stage and natural
decline production. Due to the fact that the impact of the stimulation
treatments can be considered comprehensively when the develop-
ment plan is compiled, the production proration plan is arranged with
composite decline rate to get the composite decline production.
Therefore, the natural decline rate is difficult to obtain. Here we adopt
representative empirical formula e Arps decline formula to estimate
the natural decline production. The unit operating cost at decline stage
with no stimulation measures is denoted as:
8
c0 ,q0 < exponential : c0 ,edt
¼ ¼
1
cqt (6)
: hyperbolic : c0 ,ð1 þ nDi tÞ ; t˛n3
n
qNt
harmonic : c0 ,ð1 þ Di tÞ
(2) Composite decline production
Composite decline production is defined as the production with
implement of stimulation treatments. The production can be deter-
mined by multiplying production output at plateau stage and
composite decline rate. The composite decline rate represents the
production decline rate when there is no new well being put into
production; that is to say, the ratio of the difference between the
production at this stage of deduction of production from new wells
and production at the last stage to the production at last stage is called
192 D. Luo, X. Zhao / Energy 40 (2012) 189e195

composite decline rate. Production test, reservoir analogy and empir- Table 1
ical method are used to predict the composite decline rate in new area. Some parameters used for this example.

Parameters Values Units

qRt ¼ q0 ,ð1  DR Þt (7) Geological reserve N 46.4 Million barrels
Production rate v 2%
Unit operating cost in plateau phase c0 1.4 USD/barrel
3.2. Learning curves Constant decline rate of the exponential decline d 0.12
Composite decline rate DR 2%
Learning curves describe the relationship between cumulative Learning rate LR 5%
production and unit production cost, which reflects the influence of Producing life T 20 Year

accumulated experience and technology advancement on unit cost.

Learning curves are generally defined as follows:
ct ¼ c0 ,Qtb
b is learning coefficient. The bigger b is, the faster the unit cost
decreases along with the increase of cumulative production. In
empirical study, the learning rate (LR) is a parameter that expresses
the rate at which costs decrease each time cumulative production
doubles, and is given by LR ¼ 1  2b.
Learning curves incorporate the effects of technological
advances and experience accumulation. Technology advancement
is not amenable to certainty, and its influence on operating cost in
different oilfield varies. But the variance is negligible in applica-
tions. So, assuming the labor force and technological revolution
remain constant, we can use the parameters fitting by history data
to predict the influence of experience increase and technology
advances on unit operating cost.
3.3. Break-even analysis
When the net cash flow of oilfield turns negative, the operator
will shut down operations. Toward the end of the lifetime of oil-
field, the capital expenditures and depreciation are generally
negligible, so the net cash flow for an oilfield is shown as
NCFðtÞ ¼ RðtÞ  ROYðtÞ  CðtÞ  TAXðtÞ
The break-even point (BEP) is defined as the point when the net
cash flow is equal to zero. That is to say, the operating cost of the
oilfield is equal to the net revenue after royalty is deducted, since
the tax rate is a fixed percentage of profits. Below the point, it is no
longer commercial to continue operation. So an oilfield will cease
studies [30]. This model is established as the economic limit of
stimulation treatments targeted cost has just reached, and the
(8) technological and economic data is easy to obtain from the
information at this stage or analogy. For demonstration purposes,
a simplified exploration project is used that will be valued. The
simplification of this example does not affect the application of
the model.
Block X is located on Oued Zar field in Tunisia. Some important
parameters used for prediction are shown in Table 1, and their
values are taken by analogy from the similar blocks [31].
In the exploration project of block X, the natural decline
production without any stimulation accords with exponential
decline rule as qt ¼ N v edt ¼ 92.8 e0.12t. The predicted natural
decline and composite decline production and actual production of
this block can be seen in Fig. 1.
Learning rate is 5% [22] and the learning coefficient b ¼ 0.074 is
calculated by LR ¼ 1  2b.The operating cost predicted by both
learning curves and production decline rule and actual cost are
illustrated in Fig. 2.
The royalty rate is 15%. The break-even oil prices versus the life
cycle of this field are plotted in Fig. 3.
Comparing from the predicted and actual operating cost in
Fig. 2, we see operating cost tend to rise constantly as time goes and
production declines. In consideration of the influence of learning
rate, the operating cost is not merely increasing exponentially, but
(9)
the increase gradually slows.
The mean percentage error (R) is introduced to describe relative
error from prediction,
 
1 XCt0  Ct 
R ¼   100%; (12)
T Ct 
0

production at this point.

and R is calculated equal to 7.18%. In order to exam the accuracy of
The gross revenue is computed from the product of the oil price
prediction, the statistic U is constructed, and
and annual production: R(t) ¼ P(t) qt. The royalty is usually a fixed
percentage r of gross revenue, ROY(t) ¼ R(t) r, 0  r < 1. So the X
m _2
break-even oil price can be computed by following equation: U ¼ T, P R ðet Þ; (13)
k¼1
PðtÞ,qt ,ð1  rÞ ¼ CðtÞ (10) _ PTk PT
whereP R ðet Þ ¼ t ¼ 1 et etþk =
2
t ¼ 1 et , et ¼ Ct0  Ct .
that is

CðtÞ
PðtÞ ¼ (11)
qt ,ð1  rÞ

4. Example

In this section, the operating cost prediction model is applied

in an exploration project evaluation. It should be noted that
exploration and development need to be evaluated as a complete
system. Since petroleum exploration itself is not a complete
inputeoutput economic system, the value of petroleum explora-
tion will be realized by commercial exploitation, only if the
reserve has been proved and capacity built [29]. The lack of data at
the field level has been a major obstacle to insightful analysis, so
field level behavior has been considered too erratic in empirical Fig. 1. Predicted and actual production of block X.
 D. Luo, X. Zhao / Energy 40 (2012) 189e195
Fig. 2. Actual and predicted operating cost of block X.
The verification indicates that U is approximate c distribution 2
with degree of freedom (m  1), in which m is appropriate
parameter by random selection [32]. We can use c2 distribution to
exam the flexibility of time series model: if U  c2a ðm  1Þ, the
model is considered to reach the accuracy, and vice versa. From c2
distribution lists, c20:05 ð14Þ ¼ 23.685 when significance level
a ¼ 0.05. The value of U is 16.373 calculated by the model and
parameters in Table 1. U ¼ 16.373 < c20:05 ð14Þ, so the model meet
the requirements.
This model is applied in several oilfields such as Oued Zar, El
Borma etc. in Tunisia. The relative errors are within 10%, and all the
results of statistic U satisfy the requirements of accuracy. Therefore,
the model has general feasibility.
The difference between predicted and actual operating costs is
due to the data and model uncertainty in model construction,
especially the uncertainties to each factor in analogy. Sensitivity
analysis is introduced to describe the influence of changes of each
factor on operating costs. Sensitivity analysis is the study of how
the variation in the output of a mathematical model can be
apportioned, qualitatively or quantitatively, to different sources of
variation in the input of a model. A sensitivity analysis was per-
formed to determine the main factors causing the most variability
in the model. The procedure is to calculate the benchmark value of
each input variable, and then to change, respectively, the bench-
mark value of each input variable by 10% and 20% when the other
input variables are kept unchanged, and then to study how model
changes with the changes in each input variable [33]. Here we
choose the learning rate (LR), constant decline rate of exponential
decline (d), composite decline rate (DR), geological reserve (N),
production rate (v) and unit operating cost in plateau phase (c0) as
tested factors and introduce sensitivity coefficient (Sc) to interpret
the results. Sensitivity coefficient is defined as the ratio of change
rate of operating cost to that of an uncertainty factor, which is
Fig. 3. Break-even oil price versus the life cycle of this field.
193
c0
v
The 20th year
N The 15th year
The 10th year
DR
LR
-1 -0.5 0 0.5 1 1.5 2 2.5
Sensitivity Coeffcient
Fig. 4. Six factors with impact on operating costs over time.
computed as Eq. (9), where DA/A denotes the change rate of oper-
ating cost and DF/F represents the change rate of an uncertainty
factor.
DA=A
Sc ¼ (14)
DF=F
The Fig. 4 shows the evolution of the influence of the learning
rate (LR), constant decline rate of the exponential decline (d),
composite decline rate (DR), geological reserve (N), production rate
(v) and unit operating cost in plateau phase (c0) on the operating
costs among the 10th year, 15th year and 20th year. As can be seen,
LR and DR are negatively related to the operating costs, and as LR
and DR increase, the operating costs decrease; c0, N, v and d are
positively correlated to the operating costs. Among these six
factors, c0 is the factor with greatest effect on the operating cost in
the 10th year, followed by N, v, d, LR and DR. Over time, the effect of
d is gradually overtaking that of c0. Simultaneously, the influences
of DR, d and LR on operating costs are increasing, while the influ-
ences of c0, N and v almost keep constant. Since learning and
depletion are driven by production, the forecasting production over
its life cycle is based on the production in plateau phase, which is
calculated from the product of proved geological reserves (N) and
production rate (v). So the effects of N and v on operating costs are
the same (Fig. 4). Therefore, a range of values that bound the factors
is probably the best approach to follow due to the uncertainties and
unobservable variables that govern the procedure.
As the model predicts in accordance with the available infor-
mation in the phases of exploration and conceptual design for
development, the composite decline rate is simplified. Generally
the composite decline rate falls gradually as exploration continues,
and there is a negative exponential relationship between the
composite decline rate and time [34].
Unquantifiable technology innovation is inherently uncertain
[35], and the potential for breakthrough is difficult to quantify and
cannot be fully captured by the learning curves. Also, the ability of
obtaining the continuous benefit of a technology from learning is
uncertain [36], as the learning curve ignores the theoretical and
technical limitations. In order to bring the uncertainty of technical
advance into the learning curve, the estimate range of the LR can be
introduced [37]. There are some differences, since the learning rate
relies on the statistics of the U.S. petroleum operating cost collected
by Fisher in 1974, but it is applied to current operating cost. The
powerful database needs to be obtained in actual economic eval-
uation to ensure the accuracy. Besides, the learning rate data of
other countries or areas would be helpful to control the costs and
improve management for domestic and international oil explora-
tion and development of petroleum enterprises.
194 D. Luo, X. Zhao / Energy 40 (2012) 189e195

5. Conclusions burden over the life cycle of a field and for governments to design
taxation to promote cooperation.
The operating cost is incurred for maintaining oilfield operation, For the majority of oilfields, the well pattern modification and
and it is mainly influenced by factors such as the resource quality, thickening is implemented in the decline phase. Since this study
level of exploration and development, effectiveness of technology focuses on stimulation treatments as fracture and acid treat etc.
and operating management all of whose effects are absorbed in only, our results on the operating cost prediction do not capture
resource depletion and technological advances. This paper sepa- the influence of these treatments. In further study, we could
rates the effects of technological advances and resource depletion consider the effect of well pattern modification and thickening to
by using different formulas representing the two opposing forces, predict the variation of the operating cost in its whole economic
and establishes prediction model of the operating cost on the basis life cycle.
of natural decline, composite decline of the production and
learning curves. In this study, a new method assessing the Acknowledgments
economic limit of stimulation treatments has been introduced, and
the threshold is set by comparing the unit operating cost before and Funding for this work was provided by National Science and
after the treatments are taken. The model quantifies the nature of Technology Major Project through Evaluation Methods for New
the production process and the influences of technical and Investment Projects of overseas oil and gas under project number
economic factors on operating costs. The results indicate that the 2008ZX05028-005-01 and by the Major Project from the National
effect of resource depletion overwhelms the effect of technological Social Science Foundation of China through research on succeed
advance for a single oilfield, and thus the operating cost is on the strategy of overseas oil and gas resources based on the perspective
rise over its life cycle. The results also show several uncertainties on of China’s petroleum security under the project number 11&ZD164.
the operating cost. The most influential parameter appears to be c0, In addition, the authors wish to thank the anonymous reviewers of
but the influence of d is gradually overtaking that of c0 over time. this manuscript for their elaborate work.
The LR and DR have negative influences on the operating cost, while
c0, N, v and d have positive influences. Simultaneously, the influ-
Nomenclature
ences of DR, d and LR on operating costs are increasing, while the
influences of c0, N and v almost keep constant. Uncertainty on these
parameters will be further addressed through model development,
q0 The annual production in plateau phase.
data collection and expert elicitation. This model has been applied
qNt The annual natural decline production at the year “t” in
in several oilfields such as Oued Zar, El Borma etc. in Tunisia, and all
decline.
the exam results satisfy the requirements of accuracy.
qRt The annual composite decline production at the year “t”
Compared to the traditional prediction model, this model reflects
in decline.
the influence of the resource features and technical measures on the
qt The annual production at the year “t”.
production, ascribes the technical drivers to the production, which
Qt The cumulative production at the year “t”.
not only can describe the operation condition of the oilfield with
DR The composite decline rate of production.
more accuracy, but also simplify the process of the prediction. The
d The constant decline rate of the exponential decline.
variation of the operating cost is grasped from the technical view and
Di The initial decline rate of harmonic (hyperbolic) decline.
can be adopted to forecast the operating costs for petroleum explo-
n The decline exponent of hyperbolic decline which is
ration and development projects without any historical cost record.
between 0 and 1.
The analysis of the effect of technological advance on operating
N The proved geological reserves.
costs is useful for firms and management agencies to formulate
v The designed oil production rate.
research and development policies for effective cost control, and
b The learning coefficient.
investigation of the effect of resource depletion on operating costs
T The producing life.
provides crucial information for firms to develop extraction strate-
T1 The total number of the years in build-up phase.
gies. Since the overall operating costs include not only the operating
n1 The build-up phase.
costs, but also the indirect expenses which are predicted by expense
n2 The plateau production phase.
quota in general, the study of operating cost is crucial for operators to
n3 The decline phase.
forecast overall operating costs and propose effective measures to
Cdt The predicted annual operating cost with the effect of
control them. The optimization of the means of transport is not only
depletion at the year “t”.
related to the demand and distance to markets and infrastructure,
Ct The predicted annual operating cost at the year “t” with
but also depends on economic benefits of the project. The variation
effects of both depletion and technological advances.
of operating cost exerts a great influence on benefits, so that should
Ct0 The actual annual operating cost at the year “t”.
be absorbed in selecting reasonable means of transport. Meanwhile,
c0 The unit operating cost in plateau phase.
the analysis of production decline is useful for companies to design
ct The unit operating cost at the year “t”.
the throughput of pipeline so as to optimize pipeline transport.
cqt The unit operating cost in decline phase.
Severance taxes are levied as unit costs per unit of production. The
P(t) The oil price at the year “t”.
unit cost is increasing so does the severance taxes over oilfield’s life
r The royalty rate as a fixed percentage of gross revenue.
cycle. That is not conducive to the development of the remaining and
NCF(t) The net cash flow at the year “t”.
low grade reserves. The study of operating cost is helpful for
ROY(t) The royalty at the year “t”.
governments to formulate tax incentives to promote the develop-
TAX(t) The income tax at the year “t”.
ment of these poorer reserves. Most taxes on income and additional
profits are levied on net profits, which are determined after all
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