HomeMy WebLinkAbout20 - Oil & Gas Wells Rehabilitation Program Status ReportApril 12, 1999
• CITY COUNCIL AGENDA
ITEM NO. 20
TO: Mayor And Members Of The City Council
FROM: Public Works Department
SUBJECT: STATUS REPORT ON OIL AND GAS WELLS REHABILITATION
PROGRAM
RECOMMENDATIONS:
Receive and file status report on Oil and Gas Wells Rehabilitation Program
DISCUSSION:
On March 11, 1999, the newly formed Oil and Gas Field Operations Committee held its
first meeting to discuss the operation of the City's Oil and Gas facility. Staff presented
Committee members with a report outlining the history, production, economics and
future rehabilitation of the City's existing 16 oil and gas wells.
• The Committee, which consists of Public Works staff members and Councilmembers
Jan Debay and Tod Ridgeway, discussed the history and rehabilitation program of the
oil and gas operations. The minutes of the meeting are attached. The Committee
supported Phase I of the rehabilitation program approved by the City Council on
November 9, 1998, as part of the budget checklist. A copy of this item in the checklist is
attached. The first phase was to retain a geotechnical consultant to prepare technical
specifications of the oil wells that have the potential to increase oil production and select
at least one well to rehabilitate in this year's budget. The consultant's proposal is
attached.
The City will work with the consultant over the next couple weeks to select the first well
to rehabilitate. The rehabilitation cost of the first well is estimated at $25,000 to
$30,000. The work is expected to start in late April or early May and may take a couple
weeks to complete. The production results of the first well work will be reviewed by the
Committee before proceeding with more wells. If time permits, the City may be able to
complete a second well in this year's budget.
The Rehabilitation Program is a multi -phase program that could lead to waterflooding
the rehabilitated wells to further increase the oil production. In order to determine the
feasibility of waterflooding, the City will need to do a water injection test in next year's
budget. This is estimated to cost approximately $100,000 to $150,000. If waterflooding
• is feasible, the City will need to develop a funding program to construct this system. In
SUBJECT: Status Report on Oil and Gas Wells Rehabilitation Program
April 12, 1999
Page 2
order to continue with the multi -phase program, a reserve fund should be established to •
set aside oil and gas net revenues for a set time period to provide the initial capital to
improve the oil production. The funding options will depend on how soon the City wants
to increase revenues from the oil operations and the price of oil.
Respectfully �mitted,
PUBLIC WORKS DEPARTMENT
Don Webb, Director
By: -
Eldon Davidson
Utilities Manager
Attachment: March 11, 1999, Oil & Gas Operation Committee Meeting Minutes
November 9, 1998, City Council Meeting Budget Checklist Excerpt
Oil Well Rehabilitation Study Proposal
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PUBLIC WORKS COMMITTEE MINUTES
Meeting Date: March 11, 1999
CALL TO ORDER
The City of Newport Beach Public Works Committee Meeting convened at 8:30 a.m.,
March 11, 1998, in the Public Works Department, Utilities Division, Administration
Building, 949 W. 16t" Street, Newport Beach, California.
ROLL CALL
Present: Councilmember Jan Debay, Councilmember Tod Ridgeway
Staff Members Present: Public Works Director Don Webb; Utilities Manager Eldon
Davidson; Utilities Administrative Coordinator Tim Deutsch; Utilities Superintendent Ed
Burt
Others Present: Renick Sampson, Oil & Gas Operator; Mel Wright, Oil & Gas
Consultant
1. History of Oil & Gas Operations
Utilities Manager Eldon Davidson opened the meeting with an introduction of the
Public Works Staff and private consultants. Open discussion continued with Staff,
Councilmembers and Consultants regarding the development of the City's Oil & Gas
operation, as well as the history of the Department of Oil, Gas & Geothermal
Resources.
2. Review of November 91', 1998 City Council Action Pertaining to the Oil & Gas
Operations
Public Works Director Don Webb and Utilities Manager Eldon Davidson reviewed a
summary of the report on the Oil Well Rehabilitation Program that was submitted to
the City Council on November 9t', 1998, as part of the 90 -day Review of 1998 -99
Budget Checklist Council Report.
3. Discussion of the Economic and Technical Feasibility Study of the Oil Field
Rehabilitation is
Utilities Manager Eldon Davidson discussed the results of the study. Councilmembers
Jan Debay and Tod Ridgeway each asked significant questions regarding various
alternatives of the rehabilitation plan. Staff presented current budget measures,
revenue projections and future economic concerns.
4. Review of Proposal to Develop a Well Recompletion Program
Utilities Manager Eldon Davidson and Consultant Mel Wright presented the Well
Recompletion Program that is budgeted this year in the Oil Field Improvement
Program, as included in the Tideland Fund of the Capital Improvement Program.
Staff indicated that the results of the initial well recompletion would give the City
some indication as to the success of future rehabilitation. The Committee agreed
that one well should be recompleted with this year's budgeted funds and that the
results be evaluated before proceeding with any other wells. This initial process
should be limited to a maximum of $30,000.
5. Tour of City's Oil & Gas Production Facility
Public Works Staff and Consultants gave Councilmembers Jan Debay and Tod
Ridgeway a tour of the City's Oil & Gas facility located at 5810 W. Coast Highway.
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(Exert from November 9, 1998, City Council memo covering the
Budget Checklist)
TIDELANDS FUND
6. Oil Field Improvement Program - $150,000 (Hedges)
This is an annual program to provide funds to maintain, modify, and make improvements to
the oil production facilities: 16 existing oil wells, oil pumping equipment, the production
tank farm and storage facilities and the transmission lines for oil, waste water, and natural
gas. It is estimated that this cost will be $30,000. The remaining $120,000 will be used to
establish an oil well rehabilitation plan to increase the oil production. This plan will review
options which will include using an outside production company, re- drilling wells and
modifying the oil production methods. Outside geophysical and geological engineers
specializing in oil production will be used.
The City's oil production facilities are on casements over parcels of land owned by West
Newport Oil and others. The City's rights to the easements were established by a court
action in the early 1980's and we have not determined if the City has the right to sell or even
lease these rights. The City's oil wells are slant drilled out into the area under the ocean
which is called the West Newport Offshore oil field. This field is under State tidelands and
the City can not sell its rights to the oil under the public tidelands law.
Attachment B describes the City's oil field operations and the options available for increasing
production and revenues. It is recommended that the $150,000 provided in the budget be
maintained and that an ad hoc committee be set -up to further evaluate the future of the City's
oil operations.
MEMORANDUM
1]
DATE: October 15, 1998
TO: Don Webb
Eldon Davidson
FROM: Tim Deutsch
SUBJECT: Oil & Gas Operation Study
History & Background
On November 1, 1943, the City of Newport Beach entered into an agreement with D.W. Elliot
for the production of oil and gas from the City tidelands area in the West Newport Area. As a
result of this agreement 16 oil wells were drilled between 1953 and 1958. When these 16 oil
wells were originally drilled, production ranged between 50 and 235 barrels per well per day
(bpd) or approximately 575,000 barrels per year (bpy) based on 300 days per year of
operation. It is normal for oil production to significantly drop off after the first year of operation
and continue to decline during the life of the well. Exhibit A shows the location of each of the
City's wells in plan view.
The City's oil wells are slant drilled out into the area under the ocean which is called the West
Newport Offshore Oil Field. This field is under State tidelands and the City cannot sell its
rights to oil under the Public Tidelands.
As typically happens with any oil wells, the production declines and the majority of the wells
need to be rehabilitated to increase production. The rehabilitation happened in the 1960's and
early 1970's. No rehabilitation has occurred since 1971. The rehabilitation work included re-
drilling wells and adding perforations to the wells.
This rehabilitation increased production capacity, but was still less than its original capacity.
Some rehabilitated wells yielded over 90% of the original capacity, while others yielded under
50 %, and a few under 20 %.
From 1954 to 1981, several different oil companies operated the well field under contract by
the City. The City ended up in litigation with the last operator, Armstrong Petroleum
Corporation (Armstrong). Armstrong operated the oil fields from 1968 to 1981. At the end of
their contract, the oil wells had an annual production of 60,000 bpy. The City received 121/2 %
of the oil revenues. The last full year of this contract generated $60,000 to the City (oil prices
at $25.00 per barrel). The City became dissatisfied with Armstrong's operation of the oil field
in the last two years of their contract and had to take them to court to retain operation and
drilling rights of the oil fields. .
ATTACHMENT B
Oil & Gas Operation Study
Page 2
• From 1981 to the present, the City has managed the oil field operations and contracted out the
maintenance and repair of the facilities to Sampson Oil Company (Sampson). The first full
year (1982 -83) of operations by the City yielded net revenue of $975,000 (oil prices at $23.66
per barrel). When the City took over the operation from Armstrong, the equipment and site
were in poor condition and Sampson assisted the City in the upgrading of the facility to bring it
to proper working order. In 1996, the City received an award for "Outstanding Lease
Maintenance" from the California Department of Conservation, Division of Oil, Gas and
Geothermal Energy.
Under this type of contract, the City pays Sampson only for the maintenance cost and the City
receives 100% of the net revenue. Under the pre -1981 contracts, the oil companies paid the
City a royalty interest and retained the major portion of the revenue.
Exhibit B shows the 20 -year history of oil prices, oil production and revenue
Curren Operations
The Public Works Department currently manages the Oil Field Operation, with Sampson Oil
Company providing the daily operation of the facility. Exhibit "C is a five -year balance sheet
of the operation. In each of the past five years, the Oil Field operation has yielded average
• positive net revenue to the Tidelands Fund of $216,000 per year.
Due to low well production and the drop in the price per barrel, the City needs to evaluate its
operation, in an effort to maximize revenue, now and in the future.
Over the past five years, the City has been averaging approximately 45,100 barrels of oil per
year. The average price per barrel is $12.84, which takes into account the lowest oil prices in
a decade. This equates to estimated oil revenue of $579,084. Combined with annual gas
sales to Hoag Hospital, the City has averaged $624,084 per year. The current fiscal year has
seen a dramatic drop in the price per barrel. It is forecasted that the price per barrel for this
fiscal year will average about $9.75, which is a historically low oil price.
With this in mind, the estimated oil and gas sales revenue for fiscal year 1998 -99, will be
approximately $500,000. The 1998 -99 budget showed an estimated $745,000 in revenues,
with $290,000 being transferred to the Tidelands Fund. The City has determined that its
break -even point for maintenance and operation (no capital improvement) would be around
$7.31 per barrel or a budget of $330,000. This leaves a revised estimated net revenue of
$170,000 for 1998 -99.
Due to the lower production of the well field and the drop in oil prices, the City recently
retained a petroleum geologist to review the existing production (the 16 well production ranges
from 2 bpd to 15 bpd), investigate rehabilitation options and provide alternatives to increase
the revenue stream to the Tidelands Fund.
Oil & Gas Operation Study
Page 3
The study's scope of work was to provide an economic and technical feasibility evaluation of •
potential for the Newport Oil Field redevelopment. This report includes a study of each of
the16 wells to determine which ones were candidates for recompletion, redrilling, horizontal
drilling and water flooding. The table on the next page gives a financial summary of each.
• Recompletion — This is a method by which the wells are perforated in
additional oil sand areas. Eight wells were identified to be excellent
candidates for recompletion. These eight wells have a potential of
190,000 bpy. Five of the remaining eight are still candidates for future
recompletion. Recompletion of a well can cost between $60,000 to
$120,000.
Redrilling — This is a method where the existing well head remains in the
same location and the well is re- drilled to a different location in the same
or alternate oil zones. Two of the wells identified, are ones that could be
recompleted, but would be excellent candidates for redrilling. These two
wells only produce 3.8 barrels per day.
• Horizontal Drilling — This method is a relatively new technology that drills
into an oil sand area and then drills horizontal to follow the sand layer.
The wells identified for redrilling are also good candidates for horizontal
drilling.
• Water Flood — This method involves the injection of water, usually salt
water, into a producing reservoir, which adds pressure to the oil zone to
force oil to the producing well. Eventually water flooding would cut -off
50% of the gas production currently sold to Hoag Hospital.
The table below is a comparison of the capital investment, potential net revenues and the risk
level for each rehabilitation method over a 15 -year period. The net revenues are based on
optimistic production of the rehabilitated wells.
Method
Capital
Investment
Potential Revenue
($15.081barrel) - 5 yr. Avg.
Potential Revenue
($10.75Ibarrel)- Current
Risk
Level
Recompletion
$800.000
$12.000.000
$5.200.000
Low
(8 wells)
($100,000 per well)
Redrilling
$450.000 - $600.000 per well
$3.300.000
$1.950.000
Medium
(2 wells)
Horizontal Drilling
$2.100.000
$18.000.000
$11.450.000
High
(3 wells)
($700.000 per well)
Water Flood
$2.500.000
$33.676.000
$16.500.000
Medium
(3 of the 6 fault blocks)
6
Oil & Gas Operation Study
Page 4
• The lowest risk and least cost per well is recompletion of the wells. While the other methods
have higher risk, they also provide a greater return. The City could start with this method to
generate sufficient reserves to fund the more expensive methods that yield a potentially higher
production per well. If successful, the redevelopment of the oil fields may involve a mix of the
four methods depending on what level of risk one is willing to take. Prior to going forward on
any of these methods, some field- testing and analysis needs to be done in order to select the
best method.
Any significant increase in production of the oil field will require facility expansion with
additional oil tanks and appurtenances.
Future Oaerations
The information provided in the report produced by a petroleum geologist indicates that the
City has the potential to significantly increase its revenues. The City needs to decide which
direction it intends to take. Many options are available to finance the rehabilitation of the oil
field:
• Investor Only Financing — City will seek an investor, the City would
continue to manage and operate the facility and contract the
rehabilitation work with the assistance of a petroleum consultant.
• Investor to annually receive a percent of revenue.
Capital Investment Risk Taker— Investor
Revenue Split -20% Investor, 80% City (estimated)
• Investor Financing & Operation (Lease) — Investor would fund
improvements and operate facility.
Capital Investment Risk Taker— Investor
Revenue Split — 80% Operator, 20% City (estimated)
• Bank or Credit Financing — City bonds or borrows to fund
improvements and continues to manage and operate the facility.
Capital Investment Risk Taker— City
Revenue Split — 100% City
• Pay -as- you -go — City utilizes additional revenue for improvements
each year to do a mix of the options based on revenues. This
option will depend on oil prices increasing above today's level.
• Capital Investment Risk Taker— City
Revenue Split — 100% City
Oil & Gas Operation Study
Page 5
Multi -Phase Rehabilitation Program
• Must be completed within a 3 -year window of opportunity due to
the Banning Tract Commercial and Residential Development
• Phase 1 — Testing and Analysis — This will include a Rehabilitation
Program and a Facilities Development Plan prepared by a
petroleum geologist at a cost under $30,000. This will also include
one well recompletion, estimated to cost between $70,000 and
$90,000. Revenue from this recompleted well is anticipated to be
between $100,000 to $200,000 for the first year. The results of this
first well will be utilized to develop the rehabilitation plan.
• Phase 2 — An Adhoc Committee will review the Rehabilitation
Program and Financial Funding Alternatives.
• Phase 3 — Implement action plan — Council to review
recommendations from the Adhoc Committee and approve
Rehabilitation Program.
Recommendation
The oil fields need rehabilitation to be financially beneficial to the City. Staff recommends the
following:
1. That $150,000 be approved in the 1998 -99 Oil Field Improvement Program, for
the testing and analysis and rehabilitation of one well.
2. Establish an Adhoc Committee to review the Rehabilitation Program and
Financial Funding Alternatives.
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$1,400,000
$1,200,000
$1,000,000
$600,000
$600,000
$400,000
$200,000
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MERRILL E. WRIGHT
16531 Bolsa Chica SL Suite 301 ro Hunting ton Beach CA 92649 (714) 377 -9234
cetveFsbruary 2 , 1999
City of Newport Beach
Attention E. Davidson Utilities Manager
3300 Newport Blvd.
Newport Beach, CA 92658 -8915
Dear Mr. Davidson:
This is the requested follow up proposal to the Newport oil
field study dated October 19, 1998. The report investigated,
the various method of improving the oil production in the
field. The intent of this proposal is to recommend the next
more detailed phase of study for the City to institute. This
is the study of and choice of selected wells to be
recompleted. The purpose of the recompletion is to improve,
as much as possible, their oil production.
The most cost effective well work that can be done at this
time is well recompletion. This involves the choice of wells
that have oil saturated intervals in them that have not been
produced. The recompletion will include this interval in the
producing section of the well. The best candidates are
generally those with the largest footage of unproduced sand.
However, the fact that more interval.is available is not a
guarantee that the well will be the best producer. The
choosing is based both on present production and on footage
and location of unproduced sands. The lower oil producing or
idle wells with the highest chance of recompletion success
will be done first.
After, or during the later recompletion phase, the next study
of a water injection test should be started. Before the oil
reservoir can be waterflooded, testing should be done to
evaluate the oil response that can be obtained by water
injection. This will take two or three months to get
approval from the State Division of oil and Gas and then will
require three to six months of testing. one of the important
factors in the test is the choice of the first injection
wells. They must chosen both for low production and location
in the reservoir. The cost of the study phase and the work to
get D.O.G. approval will cost approximately $10,000 to
$15,000. The initiation of the test will require additional
expenditures of approximately $100,000 to $150,000 for well
completion and water handling equipment.
V
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PAGE TWO
NEWPORT OIL FIELD PROPOSAL
The continued prudent management of the oil field requires
that needed well work be done. In the interest of maximizing
the fields profitability the City of Newport should establish
a fund that is supported by oil production. The fund would
pay for the recompletions and the waterflood testing and
waterflooding as money became available. If this is not done
the production and income will continue to decline until
there are insufficient funds to do any work. At that time the
enhanced production will either have to be done by outside
financing or not done at all. Future planning and funding
must be done as early as possible.
I can begin the well recompletion study as soon as the City
approves this proposal. The choice of wells could begin to be
accomplished a few weeks there after. The cost is directly
controlled by how many wells must be reviewed. At present the
number is unknown. It is estimated that well review work
should not exceed $4,200. The City would be notified during
the study of any unusual job costs.
Thank you for this opportunity to assist you with your oil
field studies.
Sincerely
M. E. Wright
Petroleum Consultant - R.G. #1544