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The 7 deadly sins of oil field development

The team at Rockflow have seen developments of virtually every kind and colour, in every continent. We have witnessed our fair share of successful projects as well as duds – and we have often been involved in the post-mortem, offering a diagnosis for why everything turned out the way it did.

To bring some of our experience and findings together, we’ve compiled a list of reasons why developments don’t deliver on their promised value. In jest, we’ve named them the “seven deadly sins of oil field development”, and we’ll leave it up to the reader to determine if they can see any of the theological classics – pride, greed, etc. – among the technical and commercial snares.

 

1. Underestimating subsurface uncertainty

Underestimating subsurface uncertainty is one of the primary reasons for non-performance of oil and gas developments. You could say it’s the ‘original sin’ of upstream development, and many industry veterans will recognise it’s one they have been guilty of during their career, at least to some degree or another.

Fundamentally it breaks down into two areas:

  1. Not adequately capturing the range of in-place hydrocarbon volume.
  2. Not accurately estimating production forecast ranges, recovery factors and ultimate recoveries.

Mistaken in-place estimates are a common direct cause of inaccurate forecasting, but it’s not the only factor. For example, poorer-than-predicted reservoir connectivity or a lack of pressure support can be mutually independent from in-place volume. That means an unsuspecting company can be hit from both sides: suddenly facing lower than predicted in-place volume and lower than predicted recovery-factor.

Naturally, to ensure uncertainty ranges are captured, companies need to collect and analyse enough appraisal data to characterise the reservoir, its fluid properties, and its behaviour. However, even when a robust ‘base case’ is developed, there is a tendency to hyper focus on this outcome and not work the high and low ranges with equal diligence.

 

2. Overcommitting on schedule promises

This is a perennial industry problem that we see over and over again – when schedules are made that are overly aspirational and aggressive.

There are two types of schedules, namely ,project driven’ and ‘date driven’.

In a project driven schedule, the tasks, elements and dependencies required to deliver the project are specified and the completion or delivery date is determined accordingly. Acceleration options can then be identified and the trade-offs defined and assessed. It goes without saying that project driven schedules deliver satisfactory results a higher proportion of the time.

In a date driven project, a date for completion or delivery is set somewhere within the organisation, and not always by those with the greatest understanding of what is actually required to deliver the development. Initially they might think of it as a stretch schedule, a kind of line in the sand to work towards, however it rarely stays that way.

After a project schedule is created to fit the (occasionally arbitrary) dates, the schedule quickly becomes the ‘baseline plan’ (when of course it is nothing of sort) against which the project is judged. More often than not the schedule cannot be delivered, no matter how many resources are thrown at it. There’s an old phrase in project management that applies here: “nine women can’t make a baby in one month.”

Nevertheless once shareholders are promised a result, everyone jumps to achieve it – even if the deadline is not only unfeasible but will likely result in rushed decisions, delays and further deadly sins such as…

 

3. Shortcutting the Concept Select phase

When you accelerate a schedule, there’s more chance of selecting sub optimal choices that you have to rectify later. This can potentially cost more than it would to rigorously explore alternatives for a further year in the Concept Select phase.

Field development plans involve many choices and trade-offs, such as the number, type, and location of wells, the design and layout of facilities, preferred export routes, commercial strategies, regulatory requirements and associated resources and budgets.

An optimal Concept Select scheme will balance all of these requirements against the identified uncertainties, and where possible, mitigate against them – this will pay dividends, even if it takes a little more time and upfront investment.

A rushed Concept Select can lead to a development not realising its potential value. It may also result in the requirement for expensive rework during FEED and/or detailed design, or alternatively require later-life brownfield modifications. At worst, the project could simply drain a company’s precious time and resources to deliver only disappointing results.

 

4. Underestimating the cost of brownfield modifications

When you’re installing a new facility with your own export infrastructure, and you have control of everything, you are more likely to gauge costs reliably. The moment you step into brownfield territory, however, the risks of underestimating costs increase, even beyond Final Investment Decision point. It’s a big industry issue, especially in an offshore environment in more mature provinces.

This could, for example, relate to:

  • The upgrade of an old platform to meet more stringent emissions regulations
  • Host platform modifications required to accommodate a new field tie-back
  • The re-fit of an ageing FPSO vessel to extend service life et al.

There are multiple other project type examples, but the underlying failure mechanism is the same. The time, effort, cost and complexity of modifications can be grossly underestimated.

As an example, in one recent project we were involved in, the installation of a hang-off module on an existing installation came in some 300% over-budget.

Often, it’s a bit like buying an old house; the survey will only tell you so much, it’s when you start the major refurbishment works that often expensive and unbudgeted issues become apparent. If you’re not careful, profits will become marginal and in a worst case scenario the project might even result in losses.

 

5. Producing fluids you don’t expect

This is a multifaceted problem which can cause a multitude of problems. Take Kazakhstan’s Kashagan oil field, for example, where an unexpectedly high level of H2S production derailed the project, and has recently led to an additional arbitration claim for up to $138 billion in lost revenue.

More commonly, companies simply produce higher gas or water volumes than they expect – and more than the facility design caters for. This either limits production capacity or requires brownfield modification to rectify.

Flow assurance issues can also raise their head here. These might be production and process efficiency issues related to emulsions, paraffins/wax, asphaltenes and hydrates et al – which may halt production altogether until the issue is resolved.

The causes of all the above usually boil down to insufficient early appraisal and data. Sufficient samples must be gathered in the appraisal phase to correctly identify fluid properties. Further, adequate ranges of fluid production (representative of uncertainty) must be defined in the subsurface work during Concept Assess and Select. A development scheme should be selected cognisant of the range of uncertainty in fluid production compositions and rates.

 

6. Believing the hype at face value

Hype is a risk in any greenfield development or brownfield rejuvenation proposal, but it’s particularly an issue when purchasing a sale or asset. The seller obviously has an interest to maximise price, and the buyer inherits Resource volumes ranges that may or may not be realistic, as well as plans to develop them that may or may not be reasonable.

At best, such an inherited scheme may be an upside focussed development case. At worst the development could be a house built on sand.

The buyer is often tied into maturing the project, since the completion of the sale may have been a fundamental part of their fundraising story to shareholders and lenders. On occasion, the seller also inherits the operating company staff in the sale, i.e. many of the same individuals who prepared the aforementioned sales case.

This potentially makes for a very compromised situation as the ‘sales case’ can become the ‘base case’. Eventually, a more realistic base case will be defined one way or another, and hopefully before FID, but we’ve seen sellers draft Field Development Plan P50 estimates of recoverable oil reduce 35 fold, to take just one example.

Essentially you have to ensure notional values placed on a field aren’t treated as anything more than notional – even if you need a good story for your investors. Rigorous due diligence is a fundamental part of any acquisition, and a rigorous value assurance process through the development phase is vital before ranges of value are externally communicated.

There is another category here of a project that most of us will have seen touted by some group or another with evangelistic passion. You know the project – the one that somehow will deliver top quartile project metrics by developing a suspect reservoir in the middle of nowhere through the ‘management team’s combined century of experience’ and use of ‘modern development technologies’.

If it sounds too good to be true, that’s because it is. This latter example very rarely makes it to development, so perhaps should be excluded here. However, having listened to our share of snake oil sales-talk over the years, we share this observation here knowing many of you will recognise the type.

 

7. Jumping the gun (Fire, aim, ready)

Once a bullet is beginning to leave the chamber, it’s very hard to put it back in the barrel. And when companies don’t realise a project is going to cost far more than they think (due to an inadequate Concept Select work), and reality dawns during FEED and Detailed Design,    it’s sometimes hard to put on the brakes. You’re already so far into the game, nearing the final investment decision, and the pressures forcing you forward might not be counteracted by any new information that comes to light.

This particular issue is more often than not the preserve of smaller cap E&P companies. A limited portfolio of choice typically drives these companies to develop what they have, even if it is high risk and will cost more than planned – sometimes because it’s the only hand they’ve got.

For evidence of this, see the ‘elephants’ graveyard’ of AIM listed E&P companies that have failed to live up to shareholder promises or gone to the wall over the last 30 years.

The underlying cause comes down to an amalgamation of the above points – overpromising on delivery in combination with inadequate project planning, lack of clear goals, insufficient risk management and potentially poor execution management.

The consequences also combine forces: schedule delays, budget overruns, along with disputes with partners, stakeholders, government agencies, local communities and investors.

Going ahead with a project like this might buy a smaller cap E&P the time it needs to search for another project elsewhere, but it could just as easily erode investor confidence, making it harder to secure funding for future projects. Or they simply join the aforementioned elephant graveyard.

 

How to avoid temptation

You ultimately cannot get away from uncertainty in oil and gas (see point one!), but the question is how you mitigate and manage it.

Continuity of leadership is one safeguard. When your team is led by a highly experienced Project Director, they can help steer a company through the inevitable hurdles and minefields presented during the field development planning, design and execution project phases. This is also something we recommend when renewing an asset strategy.

Another way to mitigate risk is development phasing. This could take the form of an Early Production Scheme, or more than one development drilling campaign in a main development. Modular facility designs and spare well slots can also be considered, leaving space (and budget) to install additional equipment if it’s needed.

Finally, because even the best intentioned and skilled subsurface teams can suffer groupthink, it’s helpful to build a culture of peer-to-peer challenging. For the same reason,  external independent value assurance is always helpful at key milestones – and often earlier in the project than you might think.

For more on this, see our articles on assurance as it could be and why decision quality is important (and so easily falters).

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