Evaluating OPEX for marginal fields in international operations

Selecting the best operating strategy

Chuck Steube
Conoco
E. Kurt Albaugh, P.E.
Mustang Engineering

PART II: This is Part II of a two-part series. Part I, featured in February, dealt with field history and operating strategy evaluation process used for determining optimal development of the Ukpokiti Field. Part II focuses on the cost components and recommendations.
Strategy Assumptions [220,665 bytes]
Conoco created four strategy cases when evaluating the Ukpokiti Field and summarized the operating costs for each strategy. They then compared the 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.

The operating cost components were:

Labor Costs: Although labor costs were not the most expensive cost component, the number of personnel required for the operation influences all the other operating costs. Once the number of people was defined, other associated costs such as personnel logistics, material logistics, catering, etc., could be determined. The number of operations personnel had a major impact on total OPEX.
In order to determine labor costs, staffing and the job classification levels had to be defined. This was done visually by creating a series of organizational charts which showed staffing levels during the entire seven-year field life. The same positions and personnel that were shown on the organizational charts were also listed on the labor cost spreadsheet.
Personnel were organized into six groups. The groups included: a field management team, production operations personnel based on the FPSO, multi-skill personnel such as the mechanics and electricians, marine personnel for operating the FPSO, housekeeping personnel, and government officials. These officials included a Department of Petroleum Resources (DPR) and Navy personnel. The positions on the organizational charts were also color coded to illustrate different company, nationality or government association groups.
Staffing levels were evaluated and minimized with the concept of multi-skilling. This, in effect, established one maintenance group, which was responsible for the maintenance and upkeep of all systems on the FPSO, including both marine and process facility equipment. In addition, staffing levels incorporated as many of the local Nigerian work force as possible to comply with local government requirements. In the original plans, Nigerian personnel were 57% of the total work force, increasing to 64%, as personnel become more experienced with the operations, thereby reducing the number of expatriate personnel.
Personnel Logistics: The personnel mix for offshore staffing required transportation to Nigeria from the United States and Spain. Crew change rotation schedules were varied to look at cost impacts. The OPEX model was able to account for the cost impact of the rotation schedule for US expatriates, Spanish expatriates, and Nigerian nationals. By changing the mix of personnel or their rotation schedule, the cost impact of the changes could be quantified.
All expatriates flew to Lagos, Nigeria, via commercial flights. Initially, expatriate crews and company nationals were flown from Lagos via helicopter to the FPSO. Contractors were flown from Warri to the FPSO. The OPEX cost model had enough flexibility in the architecture to allow Conoco to compare the cost differential for flying crews from Lagos directly to the FPSO on a larger helicopter versus flying by plane to Warri and then flying from Warri to the FPSO on a smaller helicopter. After six months of operation, Conoco implemented the rerouting of personnel for crew change and reduced OPEX costs by $300,000/year.
Material Logistics: These costs included all shore based costs, tug boat charter, crew/supply boat charter, and customs agency fees. The shore-based costs and customs agency fees did not vary much with time and therefore did not have much of an impact on strategy selection. Consideration does need to be given to the shorebase location which can effect trip time and frequencies from offshore location to base and materials movements. The two locations considered for the base operation were Warri and Port Harcourt. Warri was selected due to its close proximity to the field, access to government regional offices, and the opportunity to integrate with an existing support base operation. Of the cost components in this category, tug and crew/supply boat chartering account for the major cost impact to OPEX. The approach selected was to locate a multi-purpose boat where services could be combined to provide the services for crew transportation, material supply transportation, and tug support for mooring export activities. This approach supported the concept of utilization of contract services since the long term chartering costs for vessels could account for up to 25% of the total OPEX.
Secondary cost components: These costs included maintenance, insurance, permitting, catering, and variable costs, such as chemicals and flaring fees. These costs have a minimal impact on the overall operating costs, and represent only 7.6% of the total OPEX.
Maintenance costs were determined based on past maintenance history for the marine equipment and a combination of downtime and performance for the process facilities equipment. Downtime for Ukpokiti was defined as interruption to the process flow or the time that any production volume is shut-in. The basis of design for the process equipment assumed a production uptime of 90%. Production uptime was also associated with each strategy and was based on the ancillary support systems ability to respond to field disruptions. Production uptime was assumed to vary between 92.5% and 97.5%, depending upon the strategy selected. The budgeted uptime for Strategy D was 97.5% verses an actual production uptime experienced at Ukpokiti of 98.6% for the 1998-operating year.
Insurance: Conoco is self-insured, and these costs only reflect insurance for property and general liability for the leased assets. Since CENL was leasing the vessel from Conoco Shipping Company, the impact of insurance on operating costs was insignificant, only 1%.
Permitting: These costs did not reflect the original importation permits to develop the Ukpokiti Field, but rather the ongoing permits any operator would incur during the operating life of the field. These costs include renewal fees and permits for additional work such as workovers. Although this was not a huge impact to total OPEX, these costs were included to reflect model accuracy.
Catering: There are several approaches that can be used when contracting catering services. Depending upon the contracting approach, catering costs can vary. The most common approach is to contract catering services to provide the housekeeping personnel, and food on a $/person per day basis. The other approach is to contract on a cost plus basis. Conoco elected to use this approach since personnel were available with the skills to manage a housekeeping staff and set menus. Utilizing the cost plus basis, Conoco was able to reduce the cost by $4/person per day from the contracted catering approach.
Variable Costs: These are the cost categories that vary because of changes in the production rates. The two variable costs are chemicals and flaring fee. The anticipated chemical dosage rates were calculated by obtaining projected production rates from a Conoco reservoir engineer and determining dosage rates. The rates were then multiplied by the chemical unit costs and the production flow rates to obtain total chemical costs. As production rates decline and produced water rates increase; the cost of chemicals also increases or decreases depending on water compatibility and quality. Initially the flaring fee had a very small impact on the operating costs, and the costs where included in the study in order to demonstrate the level of detail incorporated into the model and to improve the model's accuracy. However, after one year of operation the flaring fee was increased significantly and did impact operating costs.

OPEX cost summaries

The organization of operating cost categories and subcategories vary from company to company. Each operator presents the operating costs using their own company categories and in their own formats. The company categories and subcategories may vary slightly to account for differences in projects, country conditions, contracting approaches, or improvements in the presentation format. Irrespective of the company categories, all of the component operating costs can be summarized in three ways: annual operating costs, daily operating costs, and annual $/bbl (lift) costs. All three types of summary operating expenditures provide a slightly different perspective for the user.

Operating costs cannot accurately be estimated by sitting in the home office and making phone calls or by obtaining budgetary quotes. Every foreign operation has its own set of operational problems that can dramatically affect costs. For this reason, several field trips are required to investigate labor availability, contractor infrastructure support, logistical problems, availability of marine equipment, shorebase options, and transportation support for rotating personnel to and from the proposed field operation.

Conoco took this "hands on" approach by sending a team of personnel to talk with contractors and operators already working in the country. The fact finding field trips were absolutely necessary in order to create an accurate OPEX cost model. The field trips also helped identify the practicality of the operational strategies and the associated risks. However, not all costs were obtained from field trips. Some costs were obtained directly from contractors who quoted rates from their home offices outside the country. Taxes and duties were obtained from a local clearing agent who was identified as being the most reputable and experienced in the country. Many times the information was conflicting from the various sources. When conflicting information occurred, we found it best to check from three different sources and to utilize only the information that tended to agree.

Planned, actual costs

The operational cost model was also used to track actual versus planned costs. Total daily operating costs for the 1998 operating year has been about $62,000/day. This includes $30,000/day for the barefoot charter of the FPSO from Conoco Shipping and $32,000/day for operating costs. The original budgeted daily operating cost for the first year of operation was approximately $26,000/day versus an actual cost of $32,000/day. This was a $6,000/day difference, which increased operating cost by 23%. Even though this was unanticipated, actual operating costs were within the original cost range ($32,000 to $18,000/day) identified by Strategies A, B, C and D. It should be noted that Strategy D was selected because it had the potential to achieve the highest utilization of contract services. As planned, this cost increase has been partially offset through the sharing of logistical resources (helicopter, supply boat and shore base) with Can-Oxy commencing in September of 1998.

The major reason for the $6,000/day cost impact to OPEX was the requirement for one additional tug during export operations. Originally, if an additional tug was required, plans were to spot hire for the required time period. This proved impractical due to the lack of availability of a 100-ton bollard pull tug in the tight West Africa offshore "spot" market in the 3rd and 4th quarters of 1997. In addition, the day rates for a 100-ton bollard pull tug, including mobilization and de-mobilization fees, were cost prohibitive and forced Conoco to charter one additional tug for export operations. This increased the daily OPEX costs alone by almost 23%.

Operating costs were further impacted from the increase in flaring fees as previously mentioned and by increased staffing requirements. Material movements and warehousing proved to be more problematic than anticipated and one additional person had to be added to the staff. Security issues also required an increase in the number of personnel from two to four. In addition, the offshore workforce was underestimated and four additional personnel were added. The housekeeping workload of these seven additional people required an increase to the catering staff of three people. All personnel additions were from the local labor force, which minimized personnel logistics but did increase operating costs.

	Planned	Actual
Org Chart 1 (1997, 1998)	37	47
Org Chart 2 (1999, 2000)	35	45
Org Chart 3 (2001 - Cease Prod.)	33	43

Recommendations

There are many approaches that can be used to determine operating costs and evaluate operating strategies. The rigorous decision and risk analysis approach is time consuming, but in the long term, there are potentially significant savings to be achieved when all approaches are analyzed. If the rigorous analysis approach is used, then the following recommendations should be considered.

Use an integrated team approach early on in the evaluation process.
Create and use an "Operation Decision Tree" as a road map for selecting the most economical operating approach.
Create organization charts to establish personnel requirements early.
Review operating cost components early with design personnel to see if they can be eliminated or reduced with design changes.
Get to the field frequently and early on in the process to identify the hidden operating costs in a country.
Build one OPEX cost model that can handle all operating strategies and account for all variables.
Perform sensitivity analyses by inputting high and low variable values and record the cost impact.
Plot the results of all strategies on one graph so that cost differences can be clearly seen.
Track against the model so that the knowledge gained can be used on future estimates to make more accurate.
To determine the optimum field development approach investigate CAPEX and OPEX simultaneously.

Conclusions

A detailed OPEX cost model can be developed through research and discussions. The spreadsheet model can be used for front end estimating, detailed planning, and future cost forecasting. The OPEX cost model will enable the operator to get a clear picture of the cost impact by adjusting cost variable values and immediately seeing the cost impact of the changes. This dynamic capability of alternating cost variables provides a tool to better understand the impact and cost sensitivity of any one operating variable.

The OPEX cost model is a useful front-end loading tool. It can be used as a road map to identify operating cost ranges and the most cost-effective approach for field development.

Whenever a total field development approach is being determined, the decision to develop a field should be made by both investigating CAPEX and OPEX simultaneously.

The integrated team approach is critical for success. This approach is not only essential between the Company and the Contractor but is necessary internally to the Company itself. No other approach lends itself to viewing the project from a complete field life cycle.

Shared services agreements are a win-win situation for all parties, including the operator, 3rd party operator, and contractor. Utilization of equipment and services is the real way to decrease operator costs, which can result in significant savings.

Acknowledgement

The authors would like to thank Express Oil & Gas, Camac, Conoco Energy Nigeria Limited, and Mustang Engineering for support and permission to publish this article.

Authors

Chuck Steube, is Director of Production Operations for Conoco Shipping Company. He has more than 24 years of operational experience with Conoco ranging from onshore, arctic, and offshore field operations to offshore and onshore field project developments. He was part of the Ukpokiti Project planning team during engineering and construction phases. He was the Operations Coordinator on board the FPSO Independence during the first year of operation. 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 specializes in economic, cost, and feasibility studies for offshore and onshore field developments. He holds a BSCE from Youngstown State University and a MCE from Rice University. He has been involved in the offshore industry for 24 years and has authored or co-authored 17 articles and prepared 6 technical posters.