You’re Going To Need A Bigger FPSO
by David Archibald
11 September 2018
On August 20, 2018, Carnarvon Petroleum provided three estimates of the recoverable reserves in the Dorado Oilfield: 82, 171 and 320 million barrels. Carnarvon has been using the middle number when referring to the size of the field. All these figures are misleading in that they don’t reflect what a reasonable person might expect to be produced from the field.
On August 23, Carnarvon released this figure showing Dorado’s position as the third largest oilfield discovered off Western Australia:
The Barrow Island field doesn’t belong in this list, in that it is an onshore field in low permeability rocks that has over 800 production wells drilled into it. The list is useful when the field size is combined with initial production rate:
There is a tendency for the initial production, in thousands of barrels per day, to equate to the reserves figure in millions of barrels. This means that about a third of reserves are produced in the first year of production with the production rate falling about 30% annually thereafter.
Discovered in January, 1990, the Final Investment Decision (FID) was made on 88 million barrels of expected reserves — which included 30 million barrels of proven reserves in the Wanaea field, and a further 29 million barrels in the Cossack field. The combined field development was commissioned in 1995 at 50,000 BOPD. The Wanaea field has produced over 400 million barrels to date and the Cossack field a further 120 million barrels.
The Mutineer field was discovered in 1997 and the Exeter field in 2003. Production commenced at 70,000 to 90,000 BOPD in 2005. The development produced about 50 million barrels.
This field was discovered in 1968, with appraisal drilling following in 1997. FID was taken on reserves of 40.4 million barrels and a projected peak production rate of 40,000 BOPD. Legendre was decommissioned in 2011 after producing 45 million barrels.
Other field developments in offshore WA have also severely underestimated what they ended up producing. For example:
- The Saladin oilfield was developed on 18 million barrels and produced more than 50 million barrels.
- The Yamaderry-Cowal development was on 5 million barrels and produced more than 12 million barrels.
- The Roller-Skate development was on 8 million barrels and produced about 20 million barrels.
- The Stag field was developed on reserves of 30 million barrels and produced more than 100 million barrels.
- The Wandoo oilfield was also developed on reserves of 75 million barrels and ultimate production of 105 million barrels.
- The South Pepper oilfield was developed on 5 million barrels and produced 14 million barrels.
- The Harriet oilfield was developed on reserves of 19 million barrels and produced more than 50 million barrels.
- The Griffin oilfield was developed on initial reserves of 115 million barrels and produced 164 million barrels.
An impression you might get from the list above is that the petroleum engineers of Western Australia aren’t good at estimating oil reserves from exploration data. While that preserves their reputations for not being absurdly optimistic, it effectively cheats the shareholders they serve out of substantial value. If the discrepancy is large enough then the shareholders will have their asset taken from them, through takeover, at a fraction of its real value.
Carnarvon didn’t announce what recovery factors they used in calculating the 171 million barrel and 320 million barrel reserves figures. They likely used a figure in the mid-40% range at 2C reserves, whereas offshore WA oilfields have produced about 65% of original oil-in-place.
The most famous underestimation of recoverable reserves in Australian oil production history is that of the Gippsland Basin oilfields. When these oilfields were discovered by Esso and BHP they did not realize that the fields were sitting on a wedge of fresh water which had displaced the original, higher salinity connate water. A resistivity reading from a fresh water sample recovered from under one of the fields was used to calculate the oil saturation in the oil reservoir, with the result that it was badly underestimated. The Gippsland oilfields went on to produce more than twice the amount of oil that it was thought they were going to produce.
If we use the 320 million reserve estimate for Dorado and have production starting at 200,000 BOPD, this is a simplified spreadsheet of what the economic consequences of that will be:
Production continues to 2033, producing a total of 313 million barrels. Capital expenditure is estimated to be $1,000 million. The NPV10 is $9,653 million with an IRR of 375%.
The NPV compares with the purchase of 80% of Dorado, included with the rest of Quadrant Energy’s assets, by Santos for US$2.15 billion. This equates to what Santos might be expected to make from the first year of Dorado production.
Is it possible that Macquarie Bank and Quadrant’s other owners left billions of dollars on the table? Well it is possible, because similar things happen from time to time. For example in 2014 Newmont Mining, which had been in the business since 1916, sold the Jundee gold mine to Northern Star Resources for $82.5 million. Northern Star got its acquisition cost back from seven months of operation. Assuming that such a high quality asset would normally demand a price of at least five times earnings, then the very experienced Newmont, with no reason to sell this asset, sold it for less than 20% of what it was worth and left at least $600 million on the table.
Be aware that the Dorado oilfield could prove to be more than three times larger than Carnarvon Petroleum’s high end figure of 320 million barrels.
These days the fastest and cheapest way to develop an oilfield is by using a Floating Production Storage and Offloading (FPSO) unit. These can be built in a shipyard and floated into position. Cost may be in the range of $600 to $700 million. Chinese shipyards will provide 90% financing, so if that route is taken then the initial capital outlays by the field owners is low. The development drilling can take place while the FPSO is being built and the two systems simply have to be mated together.
The best way to develop a field the size of Dorado, given the water depth of 80 metres, is by a platform — which will have a lower operating cost and a higher ultimate oil recovery. Given the exigencies of Australian oil self-sufficiency and cash flow for the the Dorado partners, the best way to develop the Dorado field would be by using a currently stacked FPSO for a few years of initial production followed by a platform for a full field development. The problem of doing a FPSO development by the book is all the delays to first cash flow when any development of Dorado would be riskless due to that 79 meter net oil column in the Caley Formation. Santos and Carnarvon are likely to drill two appraisal wells on the Dorado structure in 2019 at a cost of $40 million each. These could be completed as production wells instead and tied into an FPSO for immediate cash flow. It would be a case of exploration by production, also providing very useful pressure data.
The Dorado discovery came along just in time as shown by this graph of WA oil production from 1969 to 2016:
The initial rise in production was from the development of the Barrow Island field. That was followed by production from the discoveries of the 1980s and early 1990s. Production now is at less than 10 percent of the peak. Dorado should see a new, higher peak in production from about 2021.
David Archibald is the author of American Gripen: The Solution to the F-35 Nightmare