How To Conduct A Feasibility Study In Oil And Gas Industry

Posted on Apr 20, 2024 at 10:04 PM

Undoubtedly, the process of feasibility study in oil and gas is one of the very difficult and risky activities, despite ensuring the presence of crude oil in a location. The process of preparing a detailed evaluation must not be neglected to verify whether the exploration process is commercially attractive or not, as it is impossible to complete this except through the preparation and feasibility study in oil and gas.

Let us share with you in detail what a feasibility study in oil and gas is, how it works and its importance. Keep reading this article.

What is a Feasibility Study In Oil And Gas?

A feasibility study is an assessment that determines the likelihood of success or failure of a proposed project. The mission of the companies requires that it conduct a qualitative study to analyse the factors relevant to the project, such as technical, economic and legal considerations. The feasibility study can also identify current and potential future issues and problems that could arise from pursuing the project. And that is to be able to finally reach an assessment that gives it an answer to the most important question, is this project worth the investment?

Feasibility study in oil and gas also helps companies manage oil and gas projects, including determining how it will operate, potential obstacles, competition, market analysis and the amount and source of financing needed to grow the business. They can help develop marketing strategies to convince investors and banks that investing in a particular project or business is a wise choice.

Once the feasibility study is complete, stakeholders should be able to fully understand all aspects of the project and can then determine whether Or Not they want to move forward with the project!

What is the Importance of a Feasibility Study in Oil and Gas?

Feasibility study in oil and gas is extremely important when contemplating the undertaking of a new project. This is due to several reasons, including:

• Identifies valid reasons to advance or veto a project idea

• Improves the focus of the project team on objectives

• Provides useful information for the next steps after the study

• Narrows potential business alternatives

• Evaluates current and needed resources and technology

• Enhances the success or failure rate of the project by assessing all variables

• Estimates the return on investment

What are the main steps of a feasibility study in oil and gas?

The feasibility study for any new project, particularly (feasibility study in oil and gas projects), follows a set of key steps to complete the study. They are below:

1- Conduct a Preliminary Analysis

The primary purpose of the preliminary analysis is to screen project ideas before extensive time, effort, and money are invested. Two sets of activities are involved.

• The First Set

It includes describing or outlining as possible the target markets, unique characteristics of services and scope of work by answering such questions, including:

• Does the project serve a currently unserved need? 

• Does the project serve an existing market in which demand exceeds supply?

• Can the project successfully compete with existing projects in the same market, in terms of price, location and availability?

• The Second Set 

It includes determining whether there are any insurmountable obstacles and problems. If the answer is “yes”, then it indicates that the chance of success of the project is slim as the problems increase:

2- Prepare a Projected Income Statement

Anticipated income must cover direct and indirect costs, taking into account the expected income growth curve. Such Factors that determine this statement are services provided, fees for services, volume of services, and adjust-ments to revenues.

3- Conduct a Market Survey

A good market survey is crucial. If the company does not have a number of experts working in this field to conduct this survey, an outside firm should be hired. The primary objective of a market survey is a realistic projection of revenues relative to global market conditions. The main steps include: 

• Define the geographic influence on the market.

• Review population trends, demographic features, cultural factors, and purchasing power in the community.

• Analysing the services provided by competing engineering firms in the market to determine their major strengths and weaknesses. Factors to consider include pricing, product lines, promotional activities, quality of service, consumer loyalty and satisfaction, and sales.

•  Estimate expected market share.

• Estimate market expansion opportunities.

4- Plan Business Organisation and Operations

At this point, the organisation and operations of the business should be planned in sufficient depth to determine the technical feasibility and costs involved in start-up, fixed investment, and operations. Extensive effort is necessary to develop detailed plans for: Equipment, Merchandising methods, Facility location and design, Availability and cost of personnel, Supply availability and Overhead (e.g., utilities, taxes, insurance)

5- Prepare an Opening Day Balance Sheet

The Opening Day Balance Sheet should include the project's assets and liabilities as accurately as possible at the time the project begins, and before it becomes profitable.

Therefore, a list of assets required to carry out project operations must be prepared. The list should include items, sources, cost, and available financing methods.

6- Review and Analyse All Data

This review is critical. You Reexamine the Projected Income Statement and compare it with your list of desired assets and the Opening Day Balance Sheet. Given all expenses and liabilities, ask yourself, does the Income Statement reflect realistic expectations?

Never lose sight of analysing risks and contingencies. Consider the possibility of significant changes in the current market that could alter expectations.

7- Make "Go/No Go" Decision

All preceding steps have been aimed at providing data and analyses to decide whether to proceed or not. If the analysis indicates that the company should yield at least the required minimum income and have potential for future growth, then it is a "positive" decision to start (Go). Any indication indicating otherwise, should be withdrawn (No Go) and not to take risks. 

Additional considerations are taken into account when making a decision:

• Is there a commitment to make the necessary sacrifices in the future in terms of time, effort and money?

• Will the project satisfy long-term aspirations?

What are the most important types for the feasibility study in oil and gas projects?

There are numerous feasibility studies that the consulting team can perform before the company decides to implement the project on the ground. Among the most important feasibility studies in oil and gas are the following:

• Technical Feasibility:

Technical feasibility includes studying and checking for accessibility to technical resources within the organisation. So, If those resources already exist, you must then determine if the technical team can customise the technology into new working systems for the project. It is not only about the right technical resources, but the equipment and devices also need to be evaluated to ensure they have the proper hardware and software for the proposed plan.

• Economic Feasibility

The economic feasibility includes everything that is economic and financial for the project. This feasibility allows the company to prepare and analyse a cost-benefit statement. This helps provide decision-makers with a detailed list of total costs and expected profits, including accidental expenses. This is so that during or after the project, they may be able to anticipate any potential unforeseen monetary challenges.

• Operational Feasibility

Operational feasibility assesses how well a proposed and drawn up plan fits within the existing business environment. And if developed or modified, will current purchasers still use these services?!.

There are some variables that affect the outcome of this analysis are the amount of technical support, the usefulness of the proposed plan to the company and customer satisfaction with the current system.

• Legal Feasibility

Before beginning a project, it must be ascertained that all legal aspects of the proposed project and the extent to which the company's policy adheres to the legal rules and requirements in that specific geographical area. In short, full legal approvals must be obtained to begin.

• Schedule Feasibility

It is very important to study the expected Schedule for carrying out the work and completing the project. All investors must define and obtain approval for specific timeframes for the business to ensure the success of the proposed plan.

An example of a feasibility study in oil and gas:

A real-world example of a feasibility study in oil and gas is India's Jicarilla Apache Reservation, which covers more than 850,000 acres of land in north-central New Mexico. This reserve belongs to the Jicarilla Apache National Company, which is one of the largest mineral companies in the San Juan Basin.

This reserve includes nearly 200,000 acres that are currently off-limits to oil and gas development in order to preserve the environmental integrity of the land. However, this area also contains a very valuable hydrocarbon reservoir underground.

Since most of the nation's revenues result from financial modeling aspects of the oil and gas industry, the company is keen in its study of the reserve to fully understand the potential of hydrocarbon reserves in the land because of its important role in achieving its financial stability and future growth.

The reserve management signed an agreement with RETTEW Company to conduct a feasibility study in oil and gas in the region and evaluate the project to see the possibility of starting gas and oil production in this very sensitive area for investment in this field. Where the RETTEW management met with the tribal departments and the local council, and began to study all aspects and challenges of oil & gas and environmental challenges before launching the project.

Above all, the company sought to document current operational conditions, identify natural resources, conduct a detailed analysis of reservoirs and wells, evaluate potential water sources, develop several production scenarios and strategies and resource protection guidelines, and prepare a matrix outlining options for development of the land.

Ultimately, the company decided to start producing oil using horizontal drilling and hydraulic fracturing, they could access oil and natural gas reserves underneath sensitive resource areas. This approach will allow natural resources to be successfully protected while still generating revenue through oil and gas extraction.

In conclusion, 

The London Premier Centre Training is honored to offer Oil and Gas Project Management Training Courses in Dubai. Here, we can only advise you to follow one of them to learn more about the management sector in oil projects.