A Real Options Approach to the Gas Blowdown Decision

Abstract

Abstract Many oil fields have gas caps or associated gas. The common approach for these fields is to continue to produce oil, whilst re-injecting any gas produced, for as long as it is profitable, and then produce gas. This approach is motivated by the belief that it will maximize the oil reserves and thus maximize the overall value of the field. In this paper we show why maximizing the length of profitable oil production does not necessarily create the most value. The analysis also provides guidance and insight on operating decisions that would not be obtained through a more conventional approach. In this paper we show how a real options valuation approach can be used to determine the optimal blowdown decision. The approach we take is to re-inject gas to maintain oil production only until the time it is more financially valuable to produce gas and thus blow-down pressure support for oil production. To model price uncertainty we use correlated two-factor price processes. We also consider, uncertainties in oil and gas reserves and production as well as in transition costs. The model is solved using the Least-Squares Monte Carlo simulation approach. We use a material balance simulator, which is embedded into the underlying model, to represent the oil and gas production. We illustrate how the approach can be used to identify optimal blowdown time, and thus maximize value, for a North Sea based oil field with associated gas. Our results indicate that the value-maximizing blowdown time is different than would be computed using traditional net present value. Furthermore, the approach we take in this paper yields a decision-policy “map” that indicates the optimal choice given the state of oil prices, gas prices, production rates, costs, and remaining reserves in any given year. The results presented here are relevant and applicable to oil and oil/gas fields across the world. Calculating the optimal blowdown time is not straightforward as it is a function of the underlying uncertainties such as oil and gas prices, their co-variation, oil and gas reserves and production, blowdown costs, and technology improvements, and its calculation is not trivial. However, ignoring these uncertainties leads to sub-optimal blowdown decisions, resulting in significant value losses.