What it means
When an oil field is first developed, natural pressure pushes oil to the surface. This is known as primary recovery, and it often leaves most of the oil in the ground.
Secondary recovery, usually injecting water, boosts pressure and brings out more, but a large share is still left behind. EOR, sometimes called tertiary recovery, changes the properties of the oil or the reservoir so that more can be produced.
Gas injection, often using carbon dioxide, makes the oil flow more easily. Thermal methods use steam to thin thick oil, and chemical methods use substances that help release oil trapped in the rock.
From a business viewpoint, EOR is an investment decision. It needs new wells, equipment and a steady supply of the injected material, so the upfront and operating costs are high.
The project makes sense only when the expected revenue from the extra oil, after taxes and royalties, exceeds those costs by an acceptable margin. Finance teams assess EOR projects using discounted cash flow, which values future cash flows in today's money.
A key input is the oil price, which can change over the life of the project, so analysts test the results at low, medium and high prices. They also consider the cost of capital and the time before production responds.
An important nuance is the link to carbon. Using captured carbon dioxide for EOR can store some gas underground while producing oil, which interests some investors, but the overall climate impact depends on how the project is designed and measured.
Policies, subsidies and carbon pricing can strongly influence whether such projects are profitable.
In practice
Real-world examples.
Example
An independent producer owns an ageing field whose output is falling each year. It invests in a carbon dioxide injection scheme to bring up oil that normal pumping cannot reach. Production stabilises and the field continues for another ten years.
Example
A national oil company uses steam injection in a field of thick, heavy oil. The finance team builds a model showing the cost of fuel to produce the steam and the price needed to break even. The board approves the project because the model shows a positive return at conservative prices.
Example
A bank considers lending to an oil company that plans to use chemical EOR. The credit team asks for an independent engineer's report on the reservoir and for sensitivity analysis on oil prices. It sets the loan size so that repayments can be met even if prices fall.
Formula
Calculation
Incremental profit = (Extra barrels recovered x Net price per barrel) - EOR project cost
Suppose a field holds 100 million barrels of oil, and primary and secondary methods recover 35%, or 35 million barrels. An EOR project is expected to lift total recovery by a further 8 percentage points, so extra barrels = 100,000,000 x 0.08 = 8 million barrels. With a net price of $45 per barrel after royalties and operating costs, extra revenue = 8,000,000 x 45 = $360,000,000. If the EOR project costs $250,000,000, incremental profit = 360,000,000 - 250,000,000 = $110,000,000, before discounting for time.Case study
Seen in the real world.
Dunmore Petroleum is a fictional producer, and this is an illustrative case study. Its main field had produced for forty years and output was declining by about 8% a year. Management faced a choice between selling the field cheaply or investing in an EOR project at an estimated cost of $180,000,000.
The finance director built a model with three oil price cases. At the low price the project barely broke even, at the middle price it returned a healthy margin, and at the high price it was very profitable. The board approved the project in phases, spending the first $40,000,000 on a pilot, and only continued after the pilot showed that extra oil was being produced as expected.
Watch out
Common mistakes.
- Assuming EOR is always profitable, when its high costs make it highly sensitive to oil prices.
- Treating recovery rates as certain, when estimates change as engineers learn more about the reservoir.
- Ignoring the cost of the injected material, such as gas or steam, which can be a major part of operating expense.
Questions
People also ask.
What are the main EOR methods?
The main methods are gas injection, thermal recovery such as steam, and chemical injection.
How much extra oil can EOR produce?
It varies widely by field and method, but it can add a meaningful share of the oil in place when conditions are suitable.
Why do investors watch oil prices closely for EOR projects?
Because the costs are largely fixed once the project starts, so a drop in prices can quickly turn a profitable project into a loss.
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