What it means
An oil field is produced in stages. In primary recovery, natural pressure pushes the oil to the surface, and in secondary recovery, operators inject water or gas to keep the pressure up and push more oil out.
Even after both stages, a large share of the oil usually remains trapped in the rock. Tertiary recovery targets that share by changing the properties of the oil or the way it moves.
Common approaches are thermal methods, which heat thick oil with steam so that it flows, and gas injection, which uses gases such as carbon dioxide to mix with oil and move it. A third group, chemical methods, uses special fluids to free the oil from the rock.
The key question for finance is whether the extra oil justifies the extra cost. These projects need large upfront investment in wells, equipment and injection materials, and the payback depends on the oil price and on how much additional oil is produced.
Tertiary recovery can extend the life of mature fields and delay the need to find new ones. It also has an environmental side, as some gas injection projects can store carbon dioxide underground, although this depends on the design.
Because oil prices move, a project that looks attractive in one price environment can look weak in another. Companies therefore test their plans against a range of prices before committing.
In practice
Real-world examples.
Example
An oil company operates an ageing field where production has fallen by half. Engineers propose injecting carbon dioxide to produce additional oil. The finance team builds a model and approves the project because the extra barrels would earn a good return. The approval depends on the oil price staying above a minimum level.
Example
A producer with very thick oil uses steam injection to heat the reservoir. The oil becomes thinner and flows to the wells. The company reports the extra barrels as a separate line in its production forecast. Lenders ask for regular reports on the extra output.
Example
A lender considering a loan to a small producer asks for a sensitivity analysis. The analysis shows how the tertiary recovery project performs if the oil price falls by $15 a barrel. The lender adjusts the loan size to allow for this risk. The result shows the project is sensitive to price.
Formula
Calculation
Recovery factor = cumulative oil produced / original oil in place x 100
Incremental value = extra barrels x (price per barrel - cost per barrel)
A field holds 100,000,000 barrels of original oil in place. Primary and secondary recovery produce 30% of it, which is 30,000,000 barrels. Tertiary recovery adds 10% of the original oil, which is 10,000,000 barrels, bringing the recovery factor to 40%.
Assume an oil price of $75 a barrel and a tertiary production cost of $55 a barrel.
Incremental value = 10,000,000 x (75 - 55) = 10,000,000 x 20 = $200,000,000
This is before tax and the cost of capital, and the figures are assumptions for illustration.Case study
Seen in the real world.
Sandstone Ridge Petroleum is an illustrative, fictional company with an old field that had produced 28% of its oil in place. The field was close to being abandoned because costs were higher than revenue.
The technical team proposed a gas injection project costing $120,000,000 that could add 6% of the original oil in place. With 80,000,000 barrels originally in place, that meant 4,800,000 additional barrels.
At an assumed margin of $25 a barrel, the extra oil would earn $120,000,000, which only just covered the cost. The company concluded that the project was too marginal and waited for better conditions, which illustrates how thin the economics of tertiary recovery can be. The company kept the engineering study on file and agreed to review it each year, since a rise in the oil price or a fall in costs could change the answer.
Watch out
Common mistakes.
- Assuming tertiary recovery always makes sense, when the cost can exceed the value of the extra oil. A project can look attractive on paper yet lose money once injection costs and a lower oil price are included.
- Using a single oil price in the model, without testing lower prices. A range of prices, including low ones, shows whether the project can survive a downturn.
- Ignoring the long time between the investment and the extra production. Projects can take years to build and ramp up, so cash flows arrive late and need discounting.
Questions
People also ask.
Is tertiary recovery the same as enhanced oil recovery?
Yes, the terms are used for the same group of techniques, although some people use enhanced recovery for all methods beyond primary.
What is the difference between secondary and tertiary recovery?
Secondary maintains pressure with water or gas, while tertiary changes the properties of the oil or the way it moves.
Why is it costly?
It needs special equipment, large amounts of injected material and more monitoring than conventional production.
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