What it means
A field is usually named and developed as a single economic unit, even though it may contain dozens or hundreds of wells. Companies first discover oil through exploration, then spend heavily on appraisal wells, platforms, pipelines and processing equipment before the first barrel is sold.
That upfront spending is called capital expenditure (money spent on long-lived assets), and it is the main reason oil projects are judged over many years rather than one. Production from a field follows a typical shape.
Output ramps up as wells are drilled, holds at a plateau for a time, and then declines as natural pressure falls and the easily reached oil is gone. Operators slow the decline by injecting water or gas, or by drilling extra wells, but each step costs money and has to earn its place.
The cash a field generates is usually measured per barrel. Revenue per barrel depends on the market price of oil, while costs include royalties paid to the owner of the mineral rights, the day-to-day cost of lifting oil out of the ground, and transport to market.
What remains after those items is often called the netback. Fields differ widely in cost.
A large onshore field with shallow wells may be profitable at a low oil price, while a deepwater field with a floating platform needs a much higher price to cover its fixed costs. This is why finance teams compare fields on breakeven price, which is the oil price at which the project earns exactly its required return.
Accounting for a field has its own conventions. Costs of finding and developing oil are either capitalised or expensed depending on the method a company uses, and the capitalised amount is written off gradually as oil is produced.
Towards the end of a field's life, the owner must also set aside money to dismantle equipment and restore the site, which is called a decommissioning obligation.
In practice
Real-world examples.
Example
A mid-sized exploration company completes a development plan for a new onshore field and tells lenders the field will cost $300 million to build. The bank asks for the breakeven oil price, since the loan can only be repaid if the price stays above it. The finance team shows that the field still covers its costs at $45 a barrel.
Example
A private equity fund buys a mature field from a major producer that wants to concentrate on newer projects. The field is declining at about 8% a year, so the fund values it on a schedule of falling production rather than a steady one. It budgets a drilling campaign to hold output flat for several years.
Example
A national government awards a licence for an offshore field and takes a share of revenue through royalties and tax. The finance ministry models how its income changes as production peaks and then fades, so it does not treat early windfall cash as permanent.
Formula
Calculation
Netback per barrel = oil price - royalty - lifting cost - transport cost
Daily field cash margin = netback per barrel x daily production
Suppose a field produces 5,000 barrels a day and oil sells for $70 a barrel. The royalty is 12.5% of price, so 70 x 0.125 = $8.75. Lifting cost is $15 a barrel and transport is $3 a barrel. Netback = 70 - 8.75 - 15 - 3 = $43.25 per barrel. Daily cash margin = 43.25 x 5,000 = $216,250, and over a 30-day month that is 216,250 x 30 = $6,487,500, before capital spending, tax and overheads.Case study
Seen in the real world.
Harbourlight Petroleum is an illustrative, fictional company that owns a single ageing field producing 12,000 barrels a day. Output is falling by about 6% a year, and the board must decide whether to spend $40 million on drilling new wells.
The finance director compares two paths. Without the spending, the field declines and is shut in four years, leaving a small cash pile and a decommissioning bill. With the spending, output is held near 11,000 barrels a day for three years, and the extra barrels at a netback of $35 each bring in far more than the $40 million outlay.
The board approves the drilling programme but ties the second half of the money to results from the first wells. The illustrative lesson is that a field decision is really a series of smaller bets, each checked against the price of oil and the cost of the next barrel.
Watch out
Common mistakes.
- Treating a field like a factory that will keep producing at the same rate, when output normally peaks and then declines.
- Quoting the oil price as if it were profit per barrel, when royalties, lifting costs and transport can take a large share of it.
- Ignoring decommissioning costs, which are real obligations that arrive at the end of a field's life and can run to large sums.
Questions
People also ask.
What is the difference between a field and a well?
A well is a single hole drilled into the ground, while a field is the whole area and reservoir that may be served by many wells.
Why do companies talk about breakeven price?
It shows the oil price below which a project loses money, so it lets investors compare fields of very different size and cost on one measure.
Who owns the oil in a field?
That depends on the country and the licence, and in many places the state owns the resource and grants companies the right to produce it in exchange for royalties or a share of revenue.
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