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Volume 17 • Issue 6 • November 2017
In Case You Hadn't Heard

Do you remember the alien Borg civilization in the Star Trek Voyager series? The Borg were a group of "data units" who continuously absorbed new information to advance their collective and to protect them from outside attacks. Of course they used their technology to conquer other civilizations, but the underlying processes behind their actions can be quite helpful to comprehend a new technology called blockchain.

Blockchains arrived around 2008 and had nothing to do with oil and gas at that time. Created originally as the underlying technology for the online cryptocurrency "bitcoin," blockchain has reached the mainstream, and businesses are beginning to utilize its very secure features in redefining certain business processes. Blockchain has far-reaching applications in the modern world, including the oil and gas industry. But what exactly is it? Broadly summarized, it is a system whereby data is continuously collected in, well, blocks, which in turn connect to others identified to have been built themselves on safely validated data. These blocks "trust" each other, as each segment of data making up the block is verified by both sides of a transaction. The verification is therefore decentralized away from institutions or departments whose sole traditional purpose has been verifying transactions.

A major plus of this architecture is its inherent security protocol: once blocks are connected, the data held within cannot be altered without altering the block structure itself, which is a very difficult undertaking, since it requires the "buy-in" to the change by the majority of the other blocks connected in the chain.

So what does this mean for us in our industry?

If you look at any organization's work processes, it will not take you long to find numerous places where entire teams are established only to validate previously received data and to pass it on for yet more steps to screen their work. Now imagine these intermediary steps eliminated, allowing for more direct flow, because data received is already validated beforehand by security steps within each block based on previously audited transactions.

Just think about how many commercial check points there are for selling natural gas. Imagine the potential cost savings involved if you consider the elimination of the clearinghouse functions related to selling natural gas directly to its downstream clients. BP has just introduced such a trial for its trading arm. And according to this article in the Oil & Gas Journal, a number of software developers such as Microsoft have already introduced elements of this technology within their business applications. It is only a matter of time for others to follow and for the technologies to become widely available to more companies on many different IT-platforms. Any accounting or finance group involved in reconciliation or settlement processes could be interested in adopting the technology very quickly. As soon as critical mass is reached, you could see manpower intensive transactions such as JIB, revenue, payment distributions, and many others, which rely on intermediaries and third parties, being drastically simplified. It may be sooner than you know when your partners want to employ blockchain applications for their financial transactions with you.

Resistance is futile, so go brush up on this new technology trend so you are prepared for the change!

 Upcoming Events ^ Back to Top 

SPE Hydraulic Fracturing Technology Conference and Exhibition

The Woodlands Waterway Marriott Hotel
The Woodlands, TX

January 23-25, 2018

Offshore Leadership Forum

Norris Centers
Houston, TX

December 5, 2017

 Industry Insights ^ Back to Top 

Lipstick on the Pig or Ugly Duckling into Swan?

When you are preparing to sell producing assets, you want the best price the market will deliver. Making them look attractive is important, but showing the financial value is essential. Buyers usually have a short period of time to understand the technical, financial, land, and environmental aspects of an acquisition, so showing them the value is the key to getting a higher, more competitive price. Sometimes, you can add value by doing field work to increase production. You also can prepare and present the right kind of technical and financial analyses to demonstrate real upside that will affect the selling price even without spending any capital or expense money.

In exploration and development, it is all about lease cost, drilling capital, and initial production rates; these factors dominate the economic analysis. In the post-development and mature life of an asset, activities that mitigate decline rates and lower operating costs begin to take over in importance. It is easy to forget the impact of these on reserves and value. Here is an example to illustrate the point in an unconventional field, just in the post-development stage, that is being prepared for divestment.

The asset consists of 200 producing wells in various stages of depletion and on various forms of artificial lift. Each lift method has its own cost and best time for implementation from plunger lift to gas lift to pump. Compressors and pumps are rented, and those costs are incurred on a cost-per-well-per-month basis. Produced water is hauled by truck from some wells and is injected into disposal wells from others, including wells owned by neighboring operators. Recently, the seller's salt water disposal system has been upgraded, and it is being utilized at only 30% of capacity. The field is organized into gathering or central delivery points, and each is manned by a pumper or operator, of which there are currently seven. There is an area office with several employees for maintenance and administration, including a production superintendent. All of the wells are operated with majority working interest.

The seller has prepared an internal reserve report showing decline curves for each well, each of which is in a different stage of decline. They have also prepared lease operating statements that include historical volumes and prices as well as expenses by category. They have analyzed and provided price differentials, plant yields, and gas shrinkages by purchaser. However, in addition to the actual financials, the seller has completed a comprehensive analysis of the costs by category and by well and has formulated a pro forma analysis that includes proposed operational improvements in the field and the resulting operating cost model that could be used going forward.

The operating cost model begins with a fixed component that includes all personnel, transportation of people and equipment, office rental and maintenance, and insurances. This is allowed to be reduced in increments as wells go off production at different times, allowing for reduction in pumpers and related expenses. The proposed model reduces fixed cost when each group of 30 wells or so are forecast to go off production, so that these costs reflect how the overall operation will be conducted over its life: with fewer people. It also moves what had been a per-barrel water disposal cost to the actual fixed expenses associated with operating and maintaining the water disposal system. Those oil and gas wells connected to the seller's system will not bear the burden of a volume-related disposal cost, since no matter how much water they produce, the cost to operate will not change.

Monthly per-well costs include average repair and maintenance cost and fuel and power by volume produced depending upon the lift equipment used on that well. Additional significant per-well costs reflect the rentals and operating costs associated with the various methods of artificial lift, which are analyzed for each well individually. As these wells move at predetermined times from one method to another, ending with pumps, these costs are forecast to change. And, in fact, installation of pumps not only increases production rate, it decreases cost, so it is advantageous to plan for that change as soon as the water rates are low enough to be able to be handled efficiently. On an incremental basis, the dual effect of uplifting production while decreasing cost extends the well life significantly, which increases the reserves. In this area, pumps have already been installed in 30% of the wells, so both the cost and production improvement are well documented and able to be demonstrated to a buyer.

Additional cost reduction opportunities exist in moving to purchased pumps instead of rental ones. The payout on the capital from elimination of rental payments is only about 18 months, so a plan that includes the purchase of existing pumps and new ones when needed can be demonstrated to add value for wells with remaining life of two years or more. The same kind of analysis can be done for compressors, including optimizing their size.

It would be easy to overlook the impact of such a plan on reserves, which occurs in more than one way. First, the increased production and decreased cost for pump purchase and installation increases the life of those declining wells by a number of years. And the entire field life, including lower rate wells that are already on pump, will be extended in this example case by more than six years, because the fixed costs will be supported by the increased cash flow from the more robust wells. The result in this test case, based on actual producing wells, doubled the original proved producing reserves and increased the net present value at 10% by 70% without spending any capital or expense money, only by conducting a careful analysis of data already in house.

Here are two graphs showing the producing and incremental results. On the incremental graph, you see the early impact of increased rate, and the later impact of extension of field life allowed by covering the fixed costs for a much longer period of time.

Further model enhancements could include specific compressor changeout/resizing and moving high-cost water disposal to the seller's fixed cost system. These and other ideas could require capital or expense investments to implement but could present additional value to the market.

Preparing a credible analysis of this type takes time and effort, but that fades to insignificance compared to the potential impact on value. It would take an accountant and an experienced production engineer to do the cost analysis over a period of a few weeks. I would be remiss if I did not remind you that at Collarini we are really experienced in this type of evaluation and would be happy to consult on your next project. Please give us a call if we can be of help.

Cheryl Collarini, P.E.

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The following biographies are just a small sampling of over 24,000 industry professionals who participate in our network. Please drop us a note or check out our website for more available talent.

Reservoir Engineer with a bachelor's degree in petroleum engineering and more than 30 years of experience working for small to mid-sized operators. Experienced in reserve estimation, reserve reporting, property acquisition analysis, acquisition bid preparation, drilling program development, cash flow estimate generation, budget preparation, well test design and implementation, reservoir simulation, and nodal analysis. Geographic areas worked include Texas, Oklahoma, Louisiana, Alabama, Kansas, California, Pennsylvania, the Gulf of Mexico, South America, Africa, Russia, China, Egypt, the North Sea, and Israel. Software proficiency in PHDWin, Power Tools, PROSPER, MBAL, and GAP. Registered Professional Engineer in the State of Texas. Ask for R1217

Senior Petroleum Engineer with a bachelor's degree in aerospace engineering and 24 years of experience with major production and exploration companies. Experienced in production, completions, reservoir, and mechanical engineering, business development, operations management, production and system optimization, technical support and troubleshooting, workover identification and procedures, artificial lift evaluation and installation, production and well surveillance, production forecasting, project management, economics and AFE development asset strategy and planning, and process development and implementation. Experienced with all aspects of production in Oklahoma, Wyoming, and the Gulf of Mexico, including deepwater projects, vertical and horizontal wellbores, high H2S, CO2, and all pressure depletion environments. Software proficiency includes Prosper, Petra, PEEP, OpenWells, DSS, IHS Energy Data, StimPlan, Open Enterprise Real Time Automation Systems, and Spotfire. Ask for P878

Senior Petroleum Engineer with a bachelor's degree in petroleum engineering, a master's degree in business administration, and over 30 years of experience with medium sized independents. Experienced in production operations and drilling and completion design and operations including overall field management, controlling costs, increasing efficiency, and reducing surface and downhole failure rates. Also extensively experienced in management and field supervision with special expertise in artificial lift design, CO2 flooding, waterflooding, workovers, and fracturing. Geographic areas worked include Mississippi, Louisiana, and Texas, including the Permian Basin. Ask for P903

Reservoir Engineer with a bachelor's degree in mechanical engineering and 40 years of experience in oil and gas property management, supervisory project management, reservoir and production engineering, and optimization planning for onshore and offshore international and domestic locations. Expert in multi-discipline task force coordination, joint venture partnership relations, prospect portfolio integration, and international negotiations. Possesses a strong background in exploitation of onshore and offshore fields through existing and new infrastructure production optimization, newly identified re-completion opportunities and additional development drilling; exploratory and appraisal well location selection and development scenario selection for initial production and follow-up exploitation; property acquisition and disposition analysis; prospect generation and marketing, and prospect evaluation for potential participation. Geographic areas worked include the Gulf of Mexico, the Gulf coast area, Oklahoma, and Mexico. Ask for R1011

Reservoir Engineer with a bachelor's degree in petroleum engineering and 26 years of experience working for major operators, independents, and as a consultant. Experience includes conventional and unconventional resources, field studies, reservoir characterization, 3D reservoir modeling, black oil simulation, type curve and trend analysis, volumetric analysis, economic analysis, development analysis, project planning, AFEs, fiscal management, SEC reserves estimation, reservoir surveillance, drilling optimization, horizontal wells, waterflooding, fracture treatments, steam injection, rate and pressure transient analysis, material balance studies, core analysis, new technology roll-outs, multidisciplinary team leadership, and mentoring. Geographic areas worked include Alaska, the Green River, the Gulf coast, the LA basin, the Permian Basin, the Piceance basin, the Rocky Mountains, the San Juan basin, San Joaquin Valley, south Texas, and the Uinta basin. Computer skills include AFE Navigator, ARIES, Carte, Eclipse, Enerdeq, Fekete, Gemini/Merlin, IHS, MBal, OFM, Peep, PHDWin, PowerTools, and Saphir. Ask for R1341

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 About Us ^ Back to Top 

A respected name in its field, Collarini has been providing upstream consulting services since 1985. Founded by engineers with major oil and gas company experience, the firm's specialties include reservoir engineering, geoscience, land administration and management, asset development, acquisition evaluation, divestment support, data management, reserve appraisal, and producing asset optimization. With one of the largest networks of subject matter experts in the industry and a strong leadership background in oil and gas, Collarini has the ability to select the right people for your needs.

We help achieve goals, improve asset performance, and are confident in our ability to find solutions to your complex and dynamic challenges.

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1500 S. Dairy Ashford Road, Suite 350
Houston, Texas 77077

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