Evaluation of tieback developments for marginal oil fields with timing flexibility

Abstract

The average size of new oil discoveries on the Norwegian Continental Shelf (NCS) is steadily decreasing. As standalone developments are often not economically viable for marginal fields, tiebacks to existing production facilities are considered in many cases. At the same time, many production facilities in mature production areas have spare capacity due to depleted reservoirs. In this paper we evaluate tieback development concepts for a marginal field having the choice between two hosts with different characteristics. We develop a model that allows to (1) evaluate the tieback development concepts; (2) determine the optimal choice of host facility for the field operator; and (3) optimize the timing of development taking into account oil, gas price and CAPEX uncertainty using a real options approach. In order to be able to reflect how the capacity constraints of a host affects the production potential of the field over time, we incorporate a production optimization model as part of the methodology. We apply the model to a real case on the NCS. We identify characteristics that drive the optimal choice of hosts. Specifically, we show how lifetime extension, reduction of CAPEX and additional spare capacity individually and in combination affect the competitiveness of one host over another therewith, providing valuable insight for tariff negotiations and portfolio planning. Apart from that we find that timing flexibility is of high importance in case of high downside risk. This makes our approach particularly relevant for marginal oil field development which are often characterized by prominent uncertainties.