Oil and natural gas: The basic production process

From early colonial times, Guyana’s commodity potential has attracted external investments. And this attraction has remained easily the leading indicator of both Guyana’s growth and development performance as well as its prospects. This is still true today, despite 1) the growth of the state both as a commodity producer and regulator of the economic system; 2) the diversification of the economy into non-commodity producing sectors; and 3) the substantial attraction of domestic investors into commodity producing industries.

Because of this longstanding condition a serious appreciation of Guyana’s political economy must embrace, at the very minimum, a basic or rudimentary grasp of those processes, which are involved in discovering commodity resources and later transforming such discoveries into the production and export of valued products.

The conclusion of last week’s column had indicated, that today’s along with next week’s column, will be devoted to the brief examination of 1) the likely features of the oil and gas extraction processes in Guyana’s hydrocarbons industry (oil and gas); and 2) the tricky issue of worrisome lead times between resources discovery and commercial production and export. The first item is the subject of today’s column and the second, next week’s.

The basic process

As a rule, official manuals on the oil and gas extraction industry classify the set of its activities into four major processes or phases. These are: firstly the exploration phase or stage; secondly,  the phase of drilling and development of wells; thirdly, the production phase; and, finally, the phase where production ceases, the operations site is abandoned, and the oil well(s) decommissioned. This last termination phase remains an essential part of the process, in order to secure the environment against damage caused by the commercial extraction and sale of hydrocarbons. The following sections, elaborate on the four processes.

The exploration process

The first exploration phase involves geo-physical prospecting and the systematic search for rock formations associated with significant deposits of crude oil and natural gas. Typically, this requires the drilling of what are termed in the industry as exploratory wells. These pinpoint the search for the specific location of hydrocarbon deposits. It involves high-tech surveying and mapping of the geological features (surface and sub-surface), as well as the collection of seismic data to evaluate the surveyed geological features.

In this phase, efforts are made to delineate sites for production wells and the measurement of their likely features and properties. This well-logging, as it is called, is done with specialized equipment, such as sensors that test properties of the well site (pressure, permeability, rock structures and so on).

The key observation at this stage is that the development of well(s) will only be pursued/completed if the estimate at this exploration stage is that the likely value of recoverable hydrocarbons is greater than the projected cost of getting the estimated potential of recoverable hydrocarbons to the market. If this is not the likely or projected outcome, the exploratory well(s) is plugged and more or less returned to its original condition. Guyanese are familiar with this stage, since until the recent (2015-16) commercial discoveries in the Stabroek Block by Exxon and its partners, this was the phase that had been taking place here over many years.

Drilling and well development

Stage 2 or full field (well) development commences only after exploration yields commercially recoverable hydrocarbon deposits. This stage, however, involves great expenditures, particularly those dedicated to 1) the construction of wells; 2) supporting infrastructure for moving/storing/ maintaining inputs and outputs flow; 3) necessary ancillary facilities (storage reservoirs, well head compressors, separators and so on). Of specific note, there has been rapid change in advanced drilling technologies. Today, these allow for horizontal, multilateral and multi-directional drilling along with the consolidation of well pads.

Production

This stage is described in the manuals as one where 1) the process of extracting hydrocarbons takes place; 2) separating the mixture of liquid hydrocarbons (gas, water and solids) occurs; 3) removing the non-saleable constituents are effected; and 4) selling the gas and remaining liquid hydrocarbons take place.

Today, production sites can handle crude oil output from multiple wells. Typically, the oil is processed at a refinery and the natural gas may be processed to remove impurities either in the field or at a natural gas processing plant.

Site abandonment

This involves plugging the well(s) and restoring the site to its original condition when economically recoverable resources are no longer available. The activities at this final stage are driven by the aim to contain environmental degradation.

Governance

From exploration to production and export, the oil and natural gas extraction industry in Guyana falls under the superintendence of the Guyana Geology and Mines Commission (GGMC). Under its present legal regulatory authority it is responsible for determining, monitoring and administering almost all the key elements of the production process as listed above. For readers’ convenience, Schedule 1 gives a succinct description of key areas of GGMC’s production regulation.

Schedule 1: GGMC’s Key Regulatory Areas

Item Description of Responsibilities

  1. Ensuring validity of petroleum prospecting licences
  2. Ensuring fulfilment of licensee’s obligations (including the exploration programme and expenditures commitments)
  1. Ensuring fulfilment of licensee’s steps that are supposed to follow on discovery and leading to development (rental fees, records and information, cost recovery and production sharing, crude oil pricing, and so on)
  1. Securing agreed provisions for pricing crude oil, associated and non-associated natural gas
  1. Securing agreed fulfilment of domestic content obligations (employment and training) plus supplies of oil and natural gas to the local market
  1. Ensuring fiscal agreements are adhered to (including import duties and incentives)
  1. Ensuring agreements on foreign exchange holdings are honoured
  2. Superintending the accounting and audit agreements in force
  3. Monitoring the fulfilment of environmental agreements
  4. Monitoring the termination/cancellation of licences.

 

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