PETROVIETNAM UNIVERSITY

PVU
PETROLEUM ECONOMICS
Chapter 5

Costs of Petroleum
Exploration and Production
Instructor: Hoang Hung, Ph.D.
Email: hungh@pvu.edu.vn
Mobile: 091 873 8 873

Subject Overview

Petroleum Economics
Chapter 1: Role and Characteristics of O&G Industry
Chapter 2: International Crude Oil Market
Chapter 3: International Gas market
Chapter 4: Petroleum E&P economics
Chapter 5: Costs in Petroleum E&P
Chapter 6: Tax and Law in O&G
Chapter 7: Main Trends of O&G market and Vietnam
Chapter 8: O&G industry in VN
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Petroleum Economics

Content of Chapter 5

Concepts of the Cost

Cost Classification
E&P costs in Petroleum Industry
Cost reduction Measures
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Petroleum Economics

1. Concepts of the Cost

The value of money that has

been used up to produce
something, and hence is not
available for use anymore.

Is one of acquisition, in which

case the amount of money
expended to acquire it is counted
as cost
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1. Concepts of the Cost (Cont.)

Cost Bearer
(Cost Object)

Cost
Application/
Distribution

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Cost
Accumulation

Petroleum Economics

2. Cost Classification

Variable Cost: Costs that vary with

output

Fixed Cost: A periodic cost that

remains more or less unchanged
irrespective of the output level or sales
revenue, such as depreciation,
insurance, interest, rent, salaries,

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Petroleum Economics

2. Cost Classification (cont.)

Fixed Cost and Average Fixed Cost

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Petroleum Economics

2. Cost Classification (cont.)

Variable Cost and Average Variable Cost

VC

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AVC

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2. Cost Classification (cont.)

Indirect Cost: An expense incurred in joint

usage and, therefore, difficult to assign to a
specific cost object. Indirect costs are usually
constant for a wide range of output, and are
grouped under fixed costs.

Direct Cost: An expense that can be traced

directly to a specific cost object such as a
department, process, or product.

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Petroleum Economics

2. Cost Classification (cont.)

Relationship
Between
Direct and
Indirect Costs

Direct Cost
D

Cost
Application

Cost
Object

Indirect
Cost

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2. Cost Classification (cont.)

Controllable costs: the costs which

can be influenced by the action of a
specified member of an undertaking.
Direct costs comprise:
a) direct labor,
b) direct materials,
c) direct expenses and
d) some of the overheads.
Uncontrollable costs: Costs which
cannot be influenced by the action of
a specified member of an undertaking
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2. Cost Classification (cont.)

Production Cost: A cost incurred

by a business when manufacturing
a good or producing a service.
Production Costs combine raw
material and labor.
Non-Production Cost: Indirect
costs such as administrative
overheads that do not contribute
directly to the manufacturing cost.
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2. Cost Classification (cont.)

Sunk
Cost

Opportunity
Cost

The value of
the best
alternative
forgone.

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Petroleum Economics

Money
already spent
and
permanently
lost. Sunk
costs are past
opportunity
costs that are
partially or
totally
irretrievable.

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2. Cost Classification (cont.)

Sunk
Cost in
O&G
Industry

The decision to abandon or operate an

oil well is made on the basis of its
expected cash flows and not on how
much money was spent in drilling it.

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3. E&P Costs in Petroleum Industry

3.1. Cost
Structure

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The types and relative

proportions of fixed and
variable costs that a
business incurs.
Used as a tool to determine
prices, as well as to
highlight areas in which
costs might potentially be
reduced or at least
subjected to better control.
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3. E&P Costs in Petroleum Industry

(cont.)

How Cost Structure is defined in

Petroleum E&P
On work periods (G&G works,
Exploration & Evaluation works,)
On kind of minerals (Oil, Natural
gas,),
On types of works (Drilling,
Geophysical works, Geological
mapping,)
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3. E&P Costs in Petroleum Industry(cont.)

3.2. Technical cost calculation in O&G Industry
3.2.1. Cost items in O&G production
- Energy /Materials /Wages & Insurance
- Well depreciation/O&G gathering and transportation
- O&G engineering standard cost (e.g.: HSE costs)
- Preparation & production
- Production equipment utilization cost
- General cost and other costs
3.2.2. Costs of Main Production Unit
- Raw material & supplemental materials
- Fuel/Energy
- Steam/air/compressed air
- Wages & insurance
- Depreciation of fixed assets
- Transportation/ service and others
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3. E&P Costs in Petroleum Industry

(cont.)
3.2. Technical cost calculation in O&G Industry (cont.)
3.2.3. Production unit cost and management
cost calculation & application
Production Unit cost: Direct costs of a
Production Unit:
- Production cost
- PU management cost
- Wages
3.2.4. O&G Production Cost calculation
Production Cost of Oil, PG and NG consists
of both Direct and Indirect costs

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3. E&P Costs in Petroleum Industry

(cont.)

TOE:
a unit of energy defined as the
amount of energy released by
burning one ton of crude oil. It is
approximately 42 gigajoules.

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3. E&P Costs in Petroleum Industry

(cont.)

Conversion of PG and NG volume to

TOE:

Qj = Vj x Tj
Where:
Qj: Oil Equivalent Volume (Metric Ton)
Vj: PG/NG Volume (Cubic Meter)
Tj: Conversion Coefficient
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3. E&P Costs in Petroleum Industry

(cont.)

Conversion factors:
1 boe contains approximately 0.146 toe
(i.e. 1 toe = 6.841 boe).
1 t diesel
= 1.01 toe
1 m3 diesel = 0.98 toe
1 t petrol
= 1.05 toe
1 m3 petrol = 0.86 toe
1 t biodiesel = 0.86 toe
1 m3 biodiesel = 0.78 toe
1 t bioethanol = 0.64 toe
1m3 bioethanol = 0.51 toe
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3. E&P Costs in Petroleum Industry

(cont.)

An example:
Product

Unit

Volume

Conv. factor

TOE

Oil

Ton

200.000

1.00

200.000

PG

1.000 m3

40.000

1.25

50.000

NG

1.000 m3

250.000

0.80

200.000

Total

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450.000

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3. E&P Costs in Petroleum Industry

(cont.)

Cost application rate of indirect cost is based

on unified conversed volume
bKj
DKj =

bKj

Where:
J=1 3
J=1: Oil
J=2: PG
J=3: NG
Bkj: Cost of item K for j product

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4. Cost reduction measures

Factors affecting cost:

Production Engineering
Exploration Methodology
Exploration Planning
Quality of Exploration Works
Changes in Geography, Geology and
Hydrogeology
Dynamics of prices and costs
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4. Cost reduction measures (cont.)

Cost reduction measures:

Productivity and cost saving
- New Technology
- Skillful workforce
- Commitment
- Devotion
-

- Work planning
- Discipline
- HSE
-
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Homework Assignments

End of Chapter 5

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