Osmundsen, Petter

Teigen, Kjartan H

English

Research Papers in Economics

Improved recovery from existing fields 
A survey of decision criteria
1 
 
 
By 
 
Petter Osmundsen* and Kjartan H Teigen** 
 
 
 
*University of Stavanger 
**Norwegian Petroleum Directorate 
 
 
Abstract 
The decline in oil prices, combined with high costs which are slow to deflate, has brought 
forward the date when some fields on the Norwegian continental shelf (NCS) will cease 
production. Measures are therefore urgently required to extend the producing life of these fields 
and to improve their recovery factor. The government has identified a number of projects in this 
area which it believes will provide a good return for both society and the oil companies, but 
which have nevertheless been postponed or not realised. Against that background, this article 
surveys oil company decision criteria for projects which could improve oil recovery. Subjects we 
discuss include parameters for measuring financial performance, management parameters in the 
companies, organisational structures, and research and development incentives.     
                     
1 We would like to express our thanks for rewarding conversations with and comments on the article itself from a 
number of key specialists in the oil sector, government and the academic community. We are also thankful for 
comments at SPE workshop, Increased Recovery Involves Implementation of New Technology, Session: 
Implementation of work processes, Stavanger, 10. November, 2010; a seminar for Department of Petroleum 
Technology at the University of Stavanger, May 11, 2010; and an IOR seminar at the Norwegian Petroleum 
Directorate, September 20, 2010. 
 Osmundsen appreciates funding from Norwegian Research Council. Address for correspondence: Petter 
Osmundsen, department of industrial economics and risk management, University of Stavanger, NO-4036 
Stavanger, Norway. Tel: +47 51 83 15 68. Mobile: +47 99 62 51 43. E-mail: Petter.Osmundsen@uis.no. Home  
page: http://www5.uis.no/kompetansekatalog/visCV.aspx?ID=08643&sprak=BOKMAL  Keywords: Increased oil recovery, recovery rate, decision criteria, resource management                                                                                                                    
1. Introduction 
A great deal stands to be gained in economic terms from improving recovery factors on the 
Norwegian Continental Shelf (NCS). An increase of just one per cent in oil recovery over and 
above existing plans would yield revenues in the order of USD 17-25.5 billion
2 at today’s oil 
price.
3 
Revenues must be balanced against costs, as always, but all the signs are that projects can be 
found here which are profitable for both government and oil companies. Improved oil recovery 
(IOR) can be defined as measures or activities which increase oil production by mobilising the 
residual potential (remaining reserves) in a field. This embraces supplementary activities and 
processes which are not already part of the prevailing drainage or production strategy or of other 
operational practice. 
Compared with other countries, relatively high recovery factors have been achieved on the NCS. 
                     
2 Monetary amounts have been converted from Norwegian kroner to US dollars at an exchange rate of NOK 1 = 
USD 0.17. 
3 Interview with Johannes Kjøde, Norwegian Petroleum Directorate, Norwegian Continental Shelf no 2, 2009, p 6.   
Figure 1. Development of the average expected recovery factor for oil. Source: Norwegian Petroleum 
Directorate (2009), Petroleum resources on the Norwegian continental shelf. 
 
This reflects such factors as legal requirements for injection of water and/or gas from day one if 
this is socio-economically profitable, drilling of a far greater number of wells than expected with 
the aid of more advanced (horizontal and multilateral) techniques, and enhanced knowledge of 
the fields through advanced seismic surveying and other methods.  
Figure 2. Historical growth in reserves. Source: Norwegian Petroleum Directorate (2009), Petroleum 
resources on the Norwegian continental shelf. 
Figure 2 shows that the proportion of reserve growth from existing fields is increasing in relation 
to new oil fields being developed. The recovery factor varies from field to field, and depends on 
such considerations as reservoir properties, development strategy and technology advances. 
Since 2000, however, oil production from the NCS has declined steadily. Important decisions are 
due to be taken in coming years which will have major consequences for recovering significantly 
more oil and possible additional value. Declining production rates, falling petroleum prices and 
increased costs have brought forward the cessation date for a number of fields in recent years. 
Tying new resources back to existing fields in order to extend their producing life is accordingly 
time-critical. This would improve resource utilisation in fields already on stream, extend the use 
of existing infrastructure and thereby permit the development of small supplementary resources, 
as well as postponing removal costs. 
2. Method This article draws on a number of meetings and conversations with key specialists in oil 
companies, contractors, oil service enterprises and government. In analysing the incentive 
structure in the contracts regulating the industry, we make use of contract and incentive theory – 
e.g, Hart (1995) and Bolton and Dewatripoint (2005). To understand how the behaviour of oil 
companies is affected by their perception of the way oil companies are valued by capital markets, 
we benefit from behavioural economics studies of the petroleum sector. See e.g, Osmundsen et al 
(2006, 2007).                                                                                                                            
3. Project stoppers 
The Norwegian Petroleum Activities Act is based on the concept of optimum recovery. 
Production and drainage strategies must be approved by the authorities, and the requirement to 
update and submit a resource development plan annually means that the companies have to 
demonstrate that they are applying high standards in diagnosing, understanding and planning of 
development and operation with regard to recovery over the coming year. The authorities review 
these plans every autumn before giving permission for recovery during the next 12 months. That 
gives the government instruments for use with the companies. These will be particularly 
important in the years to come, when many fields are heading for tail production while 
infrastructure – platforms with equipment and pipelines – is still in place.    
 
 
General project stoppers for IOR 
Conflict between short-term and narrow KPIs and long-term 
profitability 
Insufficient effort devoted to research and development 
No market for injection gas 
Insufficient valuation of flexibility when selecting a development 
solution 
Allocation of scarce inputs – rigs and personnel Organisational challenges 
High rate-of-return requirements 
Table 1: List of potential stoppers for IOR projects.  
 
Table 1 lists general project stoppers for IOR. Not all IOR projects are profitable, of course – as 
in all other contexts, revenues must be weighed against the costs incurred as well as against 
alternative measures. In some cases, society may assess costs differently from the companies. 
Society will normally have a lower required rate of return than the companies, for instance, 
which means that it wants more IOR projects. Differences in profitability calculations could 
particularly arise in the case of long-term IOR measures. In other cases, the project stoppers will 
be a shared challenge for the companies and the government. That applies to issues related to 
lack of information and management failures – if the companies define their key performance 
indicators (KPIs) too narrowly, for example, or if a company’s decentralised management system 
provides insufficient coordination of its R&D commitment. 
IOR is an umbrella term which covers many different types of projects, and the survey of project 
stoppers accordingly needs to be supplemented with stoppers for specific categories of IOR 
measures. See Table 2.  
  
 
Table 2: Detailed list of potential project stoppers. Various IOR measures are classified as conventional 
or unconventional, and specific examples of IOR measures are given for each group. Potential project 
stoppers are listed against each example. 
 
 4. Gas injection 
 
It would be instructive to describe and analyse a specific IOR measure. Gas injection has been 
selected here, both because it is a key measure and because it is the subject of discussion over its 
optimum scope. 
The value of injection is uncertain and complicated to calculate. Its purpose is to achieve IOR 
through the use of gas for pressure support. Assuming that other injection options (such as water) 
are not available, the expected income side is given by expected sales revenues from the 
expected additional oil recovered. This must be based on an expected price trend for oil. Account 
must be taken of the probability that a significant proportion of the injection gas can be 
recovered. Key cost elements for injection are accordingly the alternative cost of the (uncertain) 
proportion of the gas which is lost as well as the net present value associated with postponing the 
sale of the recovered gas. In order to calculate the latter, one must have a justified perception 
(expectation) of current gas prices compared with the prices which will prevail when recovery 
starts. Water injection is otherwise an alternative (or supplement) to injecting gas. The value 
added by gas injection in these circumstances is given by the value described above less the 
added value of water injection. 
Gas injection is often more efficient than the water alternative, which represents an important 
reason why such projects have been chosen despite the income delay from the deferred gas sales. 
The companies are generally less patient than the government, i.e., they apply a higher discount 
rate. That can also yield differing views about gas offtake. This is significant because, in many 
cases, gas production will mean the loss of an IOR option. The time frame is also important in 
prioritising drilling commitments. When oil prices are high, drilling and workover of injectors 
may be given a lower priority than production wells. That can yield a short-term gain, but 
potentially at the expense of overall recovery. 
The commitment to IOR appears to have lost out in the competition with exploration activity in 
recent years, while the opposite applied in the previous period. Figure 3 illustrates the decline in 
gas injection activity on the NCS.  
Figure 3. Historical gas injection and forecasts for gas injection (based on approved plans) Source: 
Norwegian Petroleum Directorate (2009), Petroleum resources on the Norwegian continental shelf. 
 
A significant consideration for the IOR commitment over time will be the relationship between 
the volume of injected gas and the amount of incremental recovery – is it constant, for instance, 
or declining over time for the NCS portfolio. As always, an important explanatory factor will 
otherwise be the development of current and expected prices for oil and gas. Exploration activity 
declined dramatically in a period of high oil prices. Unemployed rigs were used to maximise oil 
output at what could have been perceived as a price peak. In today’s conditions, much of the 
attention has shifted to exploration, which could indicate that oil and gas prices are expected to 
rise. Strictly speaking, the relevant consideration here is not only prices but also margins. 
Although oil prices are at a historically good level, margins are not particularly high for new 
projects because of the sharp increase in development and operating costs over a number of 
years.  
Changes in the commitment to IOR versus exploration do not necessarily only reflect 
developments in relative energy prices, but could also be affected by changes in oil company 
strategy. At their extremes, exploration and IOR are very different. The first represents a search for big discoveries (elephant hunt), while the other could be a matter of many small contributions 
which may individually attract little attention. Strategies for striking this balance can change 
between companies and over time. An oil company must handle both extremes. It is important to 
remember here that, from as far back as the relatively early 1980s, reserve growth on the NCS 
has related primarily to improvement measures and increased knowledge and understanding of 
driving more out of existing fields than to completely new discoveries. However, conditions for a 
high recovery factor are weaker for some new fields than for developments such as Statfjord, in 
part because of more heterogeneous reservoirs as well as lower porosity and permeability. 
5. Pilot projects 
The history of oil has taught us the significance of technological progress. One bottleneck lies in 
the transfer of innovative technologies and methods out of the laboratory or off the drawing 
board to a pilot project on an offshore field. Possible reasons for this include limited oil company 
capacity in terms of personnel and physical restrictions on individual installations. 
Decentralisation of the decision-making structure in the oil companies may also play a role – the 
individual project takes no account of the possibility that the increased knowledge could create 
value in other fields. It could be worth noting in this context that Norwegian oil history provides 
examples of pilot projects which have created hundreds of millions of dollars in added value. 
These include testing the various effects of waterflooding on Ekofisk before launching the 
project on a field scale, and crucial pilots for oil production from horizontal wells before the 
Troll Oil development was sanctioned. 
In many respects, a pilot represents an option for the oil companies. It is limited in scope, which 
means that new expertise is acquired at relatively modest cost. Work can continue if the pilot or 
project proves successful or be abandoned if it does not. This is analogous with the analysis of 
exploration investment. An option to wait is also available, with a full-scale project implemented 
if the oil price exceeds a specified critical level. For a relatively modest initial outlay, companies 
can thereby achieve a good return if the oil price rises. Probability calculations of future oil 
prices will play a role here. 
 Conclusion 
We have identified some of the general stoppers for IOR projects. These include 1) the priorities 
set by oil companies for their resources (rigs, capital and personnel), between exploration and 
IOR, and between the NCS and other regions, 2) the conflict between short-term KPIs for 
decision-makers and long-term value creation, 3) organisational challenges (sub-optimisation), 
4) overdimensioning of robustness requirements in investment analyses, and 5) the excessively 
long lead times for IOR measures compared with the producing life of the field.    
Given the critical time frame, having IOR plans ready in advance is important. Pilot projects 
must be launched today, so that the increase in knowledge becomes available in time. That 
argues in favour of a collective IOR effort involving both companies and government. 
The companies should ensure that short-term performance indicators cause the fewest possible 
distortions – financial decisions should be reached on the basis of a long-term criterion in the 
form of net present value. Furthermore, the companies should be aware of the time-criticality of 
IOR and put the necessary contingency plans in place. Testing should also be conducted now in 
order to learn as much as possible about effective IOR measures. The government should help to 
facilitate cross-licence coordination of pilot projects. Because of knowledge overspill (positive 
externalities) between licences, these should also provide direct support for such projects. The 
government should also continuously identify existing investment incentives in the companies in 
relation to socio-economic profitability in order to detect possible deviations. 
Research in the form of pilot projects is important for exploiting this potential. But knowledge 
gained from such projects often accrues to more players than those who bear the investment cost. 
Coordination problems could consequently arise, and government intervention may be required 
to ensure that the work is done. A number of other challenges related to an IOR commitment are 
also faced at present. Oil prices are uncertain in the short term, and the industry has experienced 
a cost explosion. Pressure on margins could prompt a reassessment of cessation dates, and a 
number of IOR measures could have become more time-critical. On a more general basis, IOR 
projects also face challenges related to measurement problems. It is difficult to evaluate cause 
and effect with hindsight when asking which factors were the ones which improved recovery.  
 
 
References 
 
Bolton, P and Dewatripoint, M (2005), Contract Theory, MIT Press. 
 
Hart, O (1995), Firms, Contract, and Financial Structure, University Press. 
 
Osmundsen, Asche, Misund and Mohn (2006), “Valuation of International Oil Companies”, 
Energy Journal, 27, 3, pp 49-64.  
 
Osmundsen, P, Mohn, K, Asche, F, and B Misund (2007), “Is the Oil Supply Choked by 
Financial Markets?”, Energy Policy 35, 1, pp 467-474 
 
 
 
 
 

Contract Theory,

Is the Oil Supply Choked by Financial Markets?”,

Misund and Mohn

Improved recovery from existing fields. A survey of decision criteria

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Improved recovery from existing fields. A survey of decision criteria

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