Optimal dynamic production from a large oil field in Saudi Arabia

Abstract

We model the economically optimal dynamic oil production decisions for a stylized oilfield resembling the largest developed field in Saudi Arabia, Ghawar, paying particular attention to the engineering aspects of oil production. Specifically, we begin with a fluid dynamics model composed of differential equations describing the dynamics of fluid flow as a function of fluid pressure, formation characteristics, water injection, new wells, and how these parameters change as oil extraction occurs. We then link this physical description of the field to an intertemporal optimizing economic model. The cost and revenue functions are based on data from a number of sources. We use tensor splines to approximate the value function. The optimal solution depends on exogenous variables, such as the discount rate or the timing of breakthroughs in the cost of alternative energy sources, which are uncertain. We examine solutions under a number of scenarios to account for these uncertainties.