This section contains information on the Oil and Gas Value Chain and explanation of the various Host Government Agreements

Section References:

  1. What are the main steps of an oil or gas field development project?
  2. Oil Life Cycle, Tullow Oil
  3. Society of Petroleum Engineers
  4. Oil and Gas UK
  5. Planete Energies Oil and Gas Lifecycle

This is the initial stage of the Oil and Gas Lifecycle. There are 2 components to this stage, The Technical Aspect and the Political/ Legal Aspects

Technical Aspect

There are various scientific exploration methods of deducing the presence of Oil and Gas reserves:
The Exploration Process is done in the following manner:

  1. Remote Sensing: This is the first step in settling on areas for exploration. Remote sensing enables geoscientists to examine regional structural fabrics, patterns, and contacts. Detailed mapping can be done using high-resolution satellite imagery and both high-altitude and low-level photography.
  2. Gravity/ Magnetics: This is done using an aeroplane equipped with a Magnetometer. This technique is valuable in looking for subtle stratigraphic changes and subtle fault offsets or other structural and stratigraphic features. This has to be used with other techniques such as seismic surveys.
  3. Subsurface Mapping: Subsurface maps dictate well placement and enable engineers to calculate reserves and monitor trends in reservoir performance. This is information is vital for the geoscientist as well as the economists.
  4. Seismic: this can either be 2D (developed in 1956) or 3D (developed in 1995). These techniques are used to map the subsurface distribution of stratigraphy and its structure which can be used to delineate potential Oil and Gas reserves.
  5. Exploration Well: This is the only sure way of determining whether hydrocarbons exist in a particular field, most exploratory wells come up dry. Once an exploration well is drilled Core Samples of rocks are taken and geoscientist analyses them in order to determine what type of rock they are, which can be an indicator as to whether there are any hydrocarbons in place.

(Text courtesy of information gained at the Overview of Internationa Petroleum Business Training sponsored by the Kenya Petroleum Technical Assistance Project (KEPTAP) in October 2016)

Exploration enables the company to understand the reservoirs and hence determine the type of reserve it is:

Political/ Legal Aspect

In order to explore a company must first be granted a licence by the host government. Companies identify potential countries to operate in by evaluating and non-technical risks and non-technical. At this stage, there are negotiations between the company, possible partners and the host government.

At this stage, the Oil and Gas Company has obtained promising results from the exploration phase and is willing to invest more money in determining the nature of the reservoir and type or reservoir.

Once discovery has been confirmed, 3D numerical reservoir simulation models are built:

  • to estimate the initial volume of oil and gas in the reservoir,
  • to simulate the reservoir fluid flow behaviour and optimise the field development scenario (number, type and location of wells, the level of field production, etc.).

Appraisal wells are drilled to improve the field description through further data acquisition.
This phase is important for

  • Calculating the field's profitability.
  • Determining the number of wells need to be drilled and selecting the most suitable installations for each stage of production.
  • Defining the field's production profile in order to forecast annual production volumes from the start of production to abandonment.

Basic Definitions:

Reservoir vs Reserves

Reservoir: The underground formation where oil and gas have accumulated. It consists of a porous rock to hold the oil or gas, and a cap rock that prevents its escape.
Recoverable reserves: That proportion of the oil and/gas in a reservoir that can be removed using currently available techniques.


  • Proven reserves(P90): Those reserves which on the available evidence are virtually certain to be technically and economically producible (i.e. having a better than 90% chance of being produced).
  • Probable reserves (P50): Those reserves which are not yet proven but which are estimated to have a better than 50% chance of being technically and economically producible.
  • Possible reserves: (P10) Those reserves which at present cannot be regarded as 'probable' but are estimated to have a significant but less than 50% chance of being technically and economically producible.


Any organic compound that is made up of only hydrogen and carbon atoms is considered a hydrocarbon. Crude oil is a kind of liquid hydrocarbon.


Grades refer to a way of classifying the many varieties of crude oil that exist around the world. The commonly accepted grades are:


  • Light / Heavy
    • Heavy crude has a low API Gravity and a high proportion of heavy hydrocarbon fractions;
    • Light crude has high API Gravity but a low proportion of light hydrocarbon fractions. Both heavy and light crudes can also be classified as sour or sweet.


  • Sour / Sweet —These are terms used to denote a given crude oil's sulphur content.
    • Sour Crude has a high sulphur content (0.5% by weight and above);
    • Sweet Crude has a low sulphur content (less than 0.5%). Either kind of crude can also be further classified as heavy or light.


API gravity:

Developed by the American Petroleum Institute (API), it measures how heavy or light petroleum liquids are—its relative density—when compared to water.

When the API gravity is greater than 31, the petroleum is considered lighter than water; when it is less than 31, it is heavier than water.

A field development plan establishes the following:

  • the number of wells to be drilled to reach production objectives,
  • the recovery techniques to be used,
  • the type and cost of installations, such as platforms, depending on the marine environment
  • the separation systems for gas and fluids,
  • the treatment systems needed to preserve the environment.

The Plan of Development (PoD) involves extensive stakeholder engagement and environmental, social, economic and operational are considered issues. These plans are approved by governments and regulatory authorities and their implementation is carefully monitored.

The time period over which hydrocarbons may be extracted varies between 15 to 30 years and may be extended up to 50 years or more.

The life cycle of oil and gas fields can be broken down into three stages:

  • Start-up (two to three years). During this period, production increases gradually as more and more wells are drilled.
  • Plateau production, when output stabilises. This stage also lasts two to three years, or sometimes longer in the case of larger fields.
    • Injection Phase: this elongates the production of Oil and Gas, various techniques are used for instance water, gas and chemical products.
  • The decline, during which production falls at a rate of 1% to 10% a year. When production ends, large quantities of oil and gas remain underground. Oil and gas companies are therefore constantly seeking to improve recovery rates using enhanced recovery techniques. Oil field recovery rates range from 5% to 50%.

A reservoir may be abandoned due to various factors such as hydrocarbon production rate becoming non-economical, or "Acts of God" such as natural disasters and political instability.

Before abandoning the field, the oil companies:

  • dismantle facilities such as platforms,
  • put the well in a safe state,
  • preserve the field's residual hydrocarbon
  • Agreement where Reserves can be booked
    • Concession: this is the oldest type of agreement and was first used by Middle East countries after World War 1. In this case, the company is granted rights to explore and extract oil, however, the company is expected to pay taxes and royalties to the host government based on the oil and gas extracted. Further in most cases, the Host Government gets and an Equity stake in the contact which may be free of paid.
    • Production Sharing Contract (PSC): These were developed in Indonesia in the 1960s. Under a PSC, the State contracts with an international oil company (IOC) for the IOC to provide the requisite finance and technical skills in order to explore for (and hopefully produce) oil and/or gas.
  • Reserves not booked
    • Risk Service contacts: This came into vogue in the 1970s when the Global Oil prices increased, and were mainly used in Latin America. Here the Oil company bears all the risk, the government pays the oil company based on the performance of services and the amount of Oil and Gas Produced.
    • Service Contacts: This is an agreement used for risk-free operations. The IOC provides its technical services to the State to explore and develop oil and gas resources. The IOC is remunerated by way of a service fee or payments based on the value of oil produced.
  • Other Exploration- Related Arrangements
    • Oversight by Government Entity: here the approval of budgets, development plans and other activities must be done by a government entity, in most cases the National Oil Company and a Directorate in the Ministry of Natural Resource Management.
    • Farm-in and Farm-out Agreements: this occurs where a company invites other companies to join the venture (the new company farms - in and the other farms - out). In most cases, the government has to approve the new company before the agreement is concluded.
    • Joint Venture Agreements: this is an agreement among multiple interest owners and is mostly done when the companies are bidding for blocks.
    • Joint Operating Agreement: this is an agreement between an operator and non-operators. It is what a Joint Venture becomes once the JV is awarded a block, and the operator is the company carrying out the exploration and mining in the field. In Joint Operating Agreements in many cases, the National Oil or Mining company is a party to the agreement.

Reference: EI SourceBook Guide to Petroleum Documents


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