Don’t you see what I see?
When you’re dealing with what lies beneath the surface, you’re often working with uncertainties. The same set of data is often interpreted in different ways, with a number of possible conclusions.
It’s perhaps no surprise then that when two upstream oil and gas companies are involved in a joint venture, differences in evaluation often arise. How the companies act in such situations will often determine whether the venture continues, pauses or falls into arbitration – a regrettable circumstance which, besides being expensive, does not usually lead to the additional production of oil or gas.
At Rockflow, we know first hand that while expert first impressions in the upstream sector often turn out to be valid, they’re not infallible, even for the highly experienced. That’s why we’re firm advocates of diagnosis before cure, an approach which has enabled us to help many firms navigate difficult, uncertain and sensitive situations – including disagreements between partners.
When sceptical, ask for independent advice
Let’s look at an example of this:
Two companies were involved in a joint venture – we’ll call them Company A and Company B. Their partnership had already resulted in years of oil production from a mature onshore oil field with several hundred wells.
Now the operator in this venture, Company A, wanted to change the rules of engagement a little. Their plan involved drilling hundreds of new wells, some in undrilled fault blocks, along with the implementation of a field wide water flood, which would help to displace some of the oil that had previously been inaccessible. They had seen some success with this method in parts of the field, and now they hoped to achieve similar results across the board.
This additional investment would cost the partners more than a billion US dollars.
Company B was sceptical, and they had their reasons. For one, water flooding had taken place in this oil field before. And, while reasonably successful, it couldn’t be expected to produce results forever, especially as Company B suspected a natural aquifer beneath the surface might already be creating a high water cut in the parts of the field that had not already been subjected to waterflooding.
Second, recent technical work by Company A had dramatically increased the estimate of the STOIIP (stock-tank oil initially in place), doubling the Estimated Ultimate Recovery (EUR). The oil field was large and geologically complex, with decades of production data, and while Company A were confident in their estimates, Company B didn’t want to invest before they had a second expert opinion. So they asked Rockflow for advice.
Always return to the underlying data
As we’ve said, first impressions aren’t always accurate. Even as experienced professionals, we need to keep checking ourselves to ensure we avoid bias.
The primary way to stay open minded is to go back to the underlying data. For this joint venture, the challenge lay in the sheer amount of it, with decades of production from hundreds of wells.
Three areas needed our attention and analysis:
- The STOIIP calculation
- The water production
- The undrilled fault blocks
The STOIIP calculation…
…provided an obvious hurdle: there’s no single measure for STOIIP, so we couldn’t easily substantiate or disprove Company A’s evaluation.
However, we employed two methods of analysis to create a cross check: a volumetric review starting from the seismic data, as well as a simplified material balance calculation. The latter is a useful way of gauging the size of oil fields that have seen years of production. In this case, years of production had already caused the pressure to fall significantly.
Both methods produced a similar estimate, which was much lower than Company A had proposed. The material balance also showed that an underlying aquifer was active in the field.
The water production date…
…held the answer to some vital questions: was the water cut affected only by past waterflood development? Or did a natural body of water underpin the oil, gradually displacing it through nature’s own engine?
By mapping the data to an aerial view, we could more easily spot where there were high and low watercuts, and how these matched with the water injection sites.
Decades of production data showed a high water cut, even for wells that had not been affected by the water injection. The mathematics didn’t match up with the geology unless we added a natural aquifer into the model – one which Company A had not accounted for, and which would undoubtedly make further water injection less beneficial than the proposal.
The undrilled fault blocks…
…were effectively a series of prospects. On our examination, we found that previous infill and areal extension wells had limited success, with many wells being unable to find commercial amounts of recoverable oil.
This suggested that the area was geologically complex: there was a series of faults that had created compartments, some full of oil, others not. To drill hundreds of wells here would be a highly speculative endeavour. The undrilled fault blocks were undrilled for a reason.
How to move forward: Find a compromise and collaborate
So what do you do, if you’re in a similar joint venture? If, after performing your own analysis, your evaluations don’t match those of your partner? Well, we’d recommend you don’t try to resolve it in front of an arbitral tribunal.
Both sides need to understand the other’s point of view, and work out a route to resolve the technical differences. And when there is still disagreement, we suggest you find a way to bridge the difference. That doesn’t necessarily mean cutting back the more ambitious and optimistic plan but it might well mean proceeding more cautiously.
For instance, in the example we’ve given here, the oil field was clearly geologically complex, resulting in many areas being non-oil bearing. That didn’t mean the undrilled fault blocks had no value but the partners could have approached it differently, drilling a single well into each block first to test the proverbial waters. By quantifying the exploration risk in this way, the partners might have agreed upon a far more careful and measured exploration programme.
This is particularly true when the joint venture agreement gives either partner a veto; it’s not worth trying to push a plan forward without a willingness to compromise. If one partner says no to a proposal, none of your ambition will be realised, and no extra oil or gas will be produced.
Oil and gas exploration involves uncertainty and variable data, and some of that data may be prone to errors, which leads to large ranges in interpreted results. Differing views are expected, and joint ventures need to account for this and enable collaboration regardless.
That starts by having an open mind and being guided by the data, and ideally you want an independent and highly experienced practitioner who can help you analyse it. After you’ve performed a diagnosis, it’s a matter of bridging any differences and finding a way forward so that each partner can get behind it.
To learn more, see how we’ve provided diagnosis before cure for a number of oil and gas companies across the globe.
