IRR versus Design Capasity

Lesson # 2: The correlation between field economy and size and type of development concept is either not fully understood, or the tools required to investigate this correlation to its full extent are not available. As a result the optimum development option is often overlooked.

Economic analysis in connection with early field development work suffers from lack of analysis tools. For a given site and given recovery two questions need to be properly addressed before a reliable economic analysis can be made:

  1. What is the most economic field development solution what type of subsea arrangement, type of platform, pipeline or offshore loading, etc.?
  2. For a given development solution what is the optimum production rate.

Obviously politics and market circumstances are crucial issues in this picture, but if we assume that these issues are known, we are still left with points 1 and 2 above. So the next question is, how do we derive at the most optimum solution?

            To most companies analysis of this sort is very costly and ties down a large number of experts for a considerable length of time. Yet, way too few options are investigated thus making it impossible to find the most profitable solution. Ultimately, marginal fields are inadvertently left undeveloped.  

Fig. 1 illustrates how the IRR may peak and fall as the design production rate increases. It can be shown that for a lot of existing field installations, this peak was never found. Granted, a lot of variables determine the optimum design rate we have already mentioned politics and market issues but all things considered it is our belief that the optimum - most economical alternative is often overlooked.

Fig. 1

But this is too easy, it does not stop here. Fig. 2 gives and even more realistic picture . The IRR vs. production rate may have several peaks. This situation occurs different production rates requires different technology, or different contract strategy, or alter market issues, etc. 

Fig. 2

Reaching the ideal situation is impossible. However, it should be obvious to everyone that an approach to solve this problem is to develop many and reliable estimating models/algorithms that may bring both the analysis costs and time consumption down. This is why we have developed the  CERA Databank EXEC formulas. These formulas will of course not solve all the problems, but they may mean the difference between failure and success and between go and no go. 

                                              Edited April 2005