Oil Projects Dynamics V

Published on

June 3, 2018


Article by

Omar Chique

Continued from oil Projects Dynamics IV.

Projects adjust as in Figure 14. How much to adjust capacity arises out of the product of investment pressure and current capacity, with an adjustment time. Pressure values above 1 create capacity rate add-ons; values below 1 do not. This creates the capacity reinforcing loop. Capacity add-ons drive a goal oriented adjustment in construction. The tune up is made as to have enough projects in the portfolio given the projects lead time. Hence, the correction equals the indicated change in capacity times the construction time; minus current capacity in construction, in a year.

This change goal for the construction rate is then used to obtain the size of the portfolio. Given that there may be more projects in the portfolio than needed, a further change is made. Change in portfolio equals the goal minus the current value of the stock, in a year. Projects enter and leave the portfolio this way. A bigger portfolio implies add-ons to construction, new capacity, and capacity.


Figure 10, Capacity loss and Adjustment to Projects in Portfolio and Construction.

The portfolio balancing loop prevents it to take values beyond its goal. The projects in construction loop prevents this stock to go beyond the desired value. That is, the value of the capacity stock required to adjust capacity, given the lead, or construction time. The capacity loss loop drains this strategic resource, over time, at the rhythm of the oil fields time span.

Figure 11 presents the model response to an assessed price to breakeven ratio equal to 0.8 until 2001, and 1 afterwards.

Figure 11, Model Response to Price to Breakeven ratio

The stocks now have initial values. Production Capacity and Projects Portfolio: 73 BPD; Production Capacity in Construction: 31 BPD; and Developed Reserves: 122 million barrels (MMB). The assessed price to breakeven ratio is set to 0.8 in the 1992-2001 period. It is set to 1 afterwards. Initially, Projects flow from the portfolio to the in-construction stock. The former drops and the latter raises. The 1992 peak of projects in construction translates to production capacity in 1995, after the construction time (2.75 years). Developed Reserves step up too, as new production capacity has been created. Production gets higher than new developed reserves, making the net change in reserves negative. At the same time, capacity loss gets higher than the new production capacity, making the net production capacity rate negative. Production sinks.

After this transient, both net production capacity and reserves rates remain negative while the assessed oil price to breakeven ratio is smaller than 1 (2001). Then, then investment pressure starts to rebuild as it takes its new value (1). The Project portfolio and production capacity in construction stocks grow as more projects are pursued. Yet, this does not translate into a positive net production capacity or reserves rate. The lead time to build capacity and develop reserves holds the new barrels until 2004. Note, again that the construction time is set to 2.75 years. Net inflow to the production capacity and developed reserves stocks becomes positive in 2004. Those are the end results of the growth policy tested. Capacity and reserves stocks of strategic resources start to grow.

Growth in both stocks, at almost a constant rate (or slope in the figure) is consistent with a net inflow or end-result that is positive and constant or almost constant. This can be verified by looking at the net change in both stocks in the figure.

References: Chique, O. (2016) Dynamic Performance Management of Upstream Oil Companies, PhD dissertation, University of Palermo, Italy

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