PART I: Evaluating offshore OPEX for a West African marginal field

Conoco's FPSO Independence on location at Ukpokiti Field. Comparison of OPEX unit costs PART I: This is Part I of a two-part series that will continue next month. Part I deals with the history of the field and the operating strategy evaluation process used for determining optimal development. Part II will cover the cost components and recommendations for developing an approach to developing an operating strategy.

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Selecting the best operating strategy

Chuck Steube
Conoco

E. Kurt Albaugh, P.E.
Mustang Engineering
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Conoco's FPSO Independence on location at Ukpokiti Field.


PART I: This is Part I of a two-part series that will continue next month. Part I deals with the history of the field and the operating strategy evaluation process used for determining optimal development. Part II will cover the cost components and recommendations for developing an approach to developing an operating strategy.

In March 1995, Conoco Energy Nigeria Limited (CENL) acting as the technical advisor for its partners Express Oil and Gas and Camac, submitted a plan to the government of Nigeria for field development of OPL 74. Since this was the first producing operation for CENL in Nigeria, this plan outlined the steps necessary to begin field development and to obtain authorization to fully execute field operations.

The Ukpokiti Field is located in OPL 74, 15 miles offshore in approximately 88 ft of water. The field was discovered in 1992 by CENL and subsequently appraised with two wells drilled in 1994. It was evaluated to be a marginal oil field due to the recoverable reserves of approximately 30 million bbl of oil producing from two reservoirs. First oil was targeted for July 1, 1997, 16 months from the start of preliminary engineering, with a maximum anticipated flowrate of 20,000 b/d of oil and an estimated field life of 7.5 years.

Conoco considers this project and engineering and operating success. The Ukpokiti Field was developed for $103.3 million, 13.5% below budget and four months ahead of schedule. Production flowrates have averaged 20,300 b/d of oil during the first year of operation. Recently, due to market conditions the maximum allowable daily flowrate has been reduced to satisfy OPEC curtailment requirements.

Early in the planning process, Conoco decided to take a structured integrated economic approach for field development where all disciplines were involved. This approach was based on the marginality of the recoverable reserves, and each phase of the project was questioned for economic impact, operability, capital expenditures (CAPEX), and operating expenditures (OPEX) cost impact. Different development alternatives were evaluated such as:

  1. Processing using an Mobile Offshore Production Unit (MOPU)
  2. Conventional fixed platform with no processing and pipeline to third party facilities for processing
  3. Conventional fixed platform with full processing and export pipeline to third party terminal
  4. Floating Production Storage Offtake (FPSO) with contractor operating.
After evaluation of the economics, technical advantages, and disadvantages, Conoco selected Alternative 4. This alternative evolved further when negotiations with the contractor fell through. Conoco then evaluated operating and using a Conoco tanker for conversion to an FPSO. This allowed Conoco the most operating control and showed a $16 million total field life savings over all of the other field development alternatives.

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Conoco's field development approach.


Conoco utilized the Independence from its own fleet of trading tankers for the Ukpokiti Field development. The tanker was converted to an FPSO at the Asterillos Espanollos shipyard in Cadiz, Spain in 17 weeks. The process facilities engineering design was conducted by Mustang Engineering. The facilities are designed to process 20,000 b/d of oil, 40,000 b/d of water injection, 25 MMcf/d of produced gas to be used for fuel and flared, and 14,000 b/d of produced water. The process facilities were manufactured in the US, on the Gulf Coast and shipped to Cadiz for installation and hookup on the Independence by the shipyard.

Operating strategies

The operating success of the Ukpokiti project can be attributed to identifying, selecting, and implementing the most economical operating strategy. The primary reason for evaluating operating strategies was because of the marginal aspect of the field and because it was Conoco's first offshore producing field in Nigeria. It was essential that the operating plan selected was economical and practical since there was no existing infrastructure on which to fall back.

Operations personnel were integrated within the Project Team during the conceptual engineering phase of the project. As part of their responsibilities they were asked to develop an operations plan. Even though Conoco has an Exploration Office and a drilling presence in Nigeria, the Ukpokiti strategy was developed due to this being the first field operation in country. As such, prior to strategy development, several fact-finding trips were made to Nigeria to identify resources, understand country protocol and to determine the feasibility of the strategies.

Other guidelines were to develop a plan with a daily OPEX target cost of $25,000/day. For purposes of this document, OPEX refers only to daily direct field operating costs. During this exercise, four distinct operating strategies for the field emerged. Each strategy had a specific objective, and a rationale was developed to support each objective. The strategies evaluated were:

  • Strategy A: Full operational control; objective: maximize expected monetary value (EMV) through volume uptime with minimal or no risk; rationale: major capital investment high operating costs due to maximizing volume throughput. The focus is to recoup costs quickly as possible through volume.
  • Strategy B: Leverage control through minimal cost; objective: focus on cost; balancing downtime risk and volume, while maximizing EMV; rationale: development will establish a Conoco presence in Nigeria and provide low cost FPSO experience that can be leveraged worldwide. Development is expected to generate positive net cash flow.
  • Strategy C: Minimize costs; objective: operate the Ukpokiti Field with minimal operating costs (high risk); rationale: field development indicates lower projected net cash flow. Maximize value through severe cost cutting measures. This rationale could apply in the last years of field life for Strategy B for the purpose of maximizing net cash flow.
  • Strategy D: Leverage control through sharing; objective: leverage OPEX through sharing and maintaining operational control; rationale: share operating costs through leveraging to improve control and meet field needs to support material and people movement. This will also provide further opportunities, which can be leveraged with other operators in the area.
From these 4 strategies an OPEX model was developed that provided a cost range of OPEX costs based on the different cost variables. This OPEX daily cost range was as follows:

  1. Strategy A - $32,000 OPEX daily cost and a lift cost of $1.64/bbl for 1998.
  2. Strategy B - $22,000 OPEX daily cost and a lift cost of $1.13/bbl for 1998.
  3. Strategy C - $18,000 OPEX daily cost and a lift cost of $0.96/bbl for 1998.
  4. Strategy D - $26,000 OPEX daily cost and a lift cost of $1.34/bbl for 1998.
This represents a risked cost range. After these cost ranges were identified, each strategy was evaluated to determine the most practical and the most effective in terms of value compared to the other strategies. Strategy C was eliminated due to the risk of increased downtime and the concern for mitigating operational problems as this was the first operation in Nigeria for Conoco. Strategy D was eventually selected over Strategy B for two reasons:

  1. Logistical issues relating to personnel movement
  2. Potential to achieve the highest utilization of contract services through sharing, there by further reducing operating cost.
Early on in the development of the operations plan it was determined that utilization of contract services was the key for OPEX cost efficiency.

Strategy D proved viable since Conoco was able to contractually share logistical support services for personnel and materials with CanOxy. In September 1998, CanOxy began production from their Ejulebe Field located 16 miles northwest of the Ukpokiti Field. Sharing services allowed CanOxy to cost effectively develop their field and allowed Conoco to increase its utilization of contract services, thereby reducing its operating costs.

OPEX model

For the Ukpokiti project, Conoco elected to divide OPEX into three major categories: Operations, Accruals, and FPSO costs. Operations costs consist of daily direct operating costs such as labor, material logistics, personnel logistics, maintenance, catering, insurance, etc.

Accruals take into account daily accrual for future expenditures for remedial operations, plugging and abandonment of the wells, and field abandonment. FPSO operating costs include the bareboat charter of the Independence from Conoco Marine, the annual temporary import permit costs for the FPSO, and the associated Nigerian taxes.

In order to determine the operations costs for each of the four strategies, Conoco and Mustang Engineering worked together to create a Lotus 123 spreadsheet OPEX model which could analyze all four strategies, taking into account all cost components. A customized macro driven pull-down menu system was created to facilitate inputting data, and printing out the 36-page report.

The primary cost components for each strategy were listed on one page, so that the differences for each of the strategies could be clearly identified and understood. The model was set up so that the user did not have to input different values for the cost components. The user only needed to specify what strategy output is desired by inputting a "yes" or "no." This simplified approach greatly reduced the input error when analyzing four cases from a single model.

The model was created to take into account all of the known operational cost components.

Comparing strategies

As each strategy case was created it was saved as a separate file. A second spreadsheet was also created to summarize the operating costs for each strategy. This spreadsheet automatically produced an executive summary report, which numerically and graphically summarized the operating costs for all four strategies.

This comparison provided the building blocks to begin an in-depth evaluation of the four strategies and to develop specific operating alternatives, which reflect the OPEX cost differences of each strategy. Development of these strategies creates the flexibility to evaluate operating alternatives based on field performance and/or oil price fluctuations.

Authors

Chuck Steube, is Director of Production Operations for Conoco Shipping Company. He holds a BA from Texas Tech University and a MBA from Tulane University.
E. Kurt Albaugh, PE is a Senior Consulting Engineer at Mustang Engineering, Inc. He holds a BSCE from Youngstown State University and a MCE from Rice University.

Copyright 1999 Oil & Gas Journal. All Rights Reserved.

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