The Oil Drum

12 comments on Why use a 5-year window?

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Khebab on September 18, 2005 - 8:07am

From the past productions, does somebody know the probability of a new project to be accurate (on time with the right numbers)? the problem is that you don't really know your field output before a few months into production.

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Bubba on September 18, 2005 - 10:30am

Almost all mega-projects, and essentially all offshore projects are designed for a specific capacity and flat production for specific period of time. Usually they are designed to have a comfortable cushion to be able to achieve the plateau rate. However, there are usually big uncertainties as to how long the project can stay on plateau or whether or not other wells will be needed to maintain the plateau rate. Also, there are always major uncertainties about schedule and cost for these projects. As a rule 90% will be over budget and behind schedule. The higher the oil price, the more likely that this will be true, as the projects are planned under certain assumptions about costs and availabilty of resources. As the world oil price rises, costs increase dramatically and resources dwindle( rigs, engineers, trained construction laborers, steel, wellheads, undersea pipeline layers, etc.).

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NC on September 18, 2005 - 5:13pm

Bubba,

Thank you for this insight into your industry. I questioned (in a very poor way in another session!) how costs change with respect to production rate. It sounds like upgrading, improving, expanding withdrawel rate WHEN prices are rising is often a money losing proposition.

This is due to higher cost for everything related to extraction and IS NOT offset by the additional oil brought to the surface. Huge costs for an incremental increase in production.

Did I understand this correctly?

Also, and I think you and J. have touched on this before, does this mean raw material costs are rising faster than energy (oil & NG) prices?

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Bubba on September 19, 2005 - 11:16am

Don't get me wrong here. When the price of oil rises producing companies make out like bandits. However, for mega-projects that take 6-10 years to bring on, the conditions that these projects are planned under rarely if ever exist when the projects actually come to fruition. When commodity prices rise, costs rise, and inefficiencies show up everywhere. Consequently, projects universally come in late and over budget. But in the end the projects make much more money than they would have if they had been executed efficiently in a low-commodity-price environment.