Oil Production Cost Function and Oil Recovery Implementation- Evidence from an Iranian Oil Field

In the process of natural depletion of an oil reservoir, the reservoir pressure declines, as does the production rate. To prevent this decline, some oil recovery methods have been proposed. These methods, despite having impacts on the natural depletion production profile, have an impact on the cost function. In this study, we investigated how the cost function (that represents the natural depletion situation of an oil field lifecycle) changes with secondary oil recovery. Gaining more knowledge on this issue is of great importance in future decision making and capacity expansion in the oil industry. Empirical evidence is presented from an oil field in south west of Iran where immiscible gas injection has been applied. For this purpose we have estimated two production cost functions; one corresponds to the current situation of the oil field (with secondary oil recovery), and the other is a simulated situation that represents a natural depletion of the oil field so far. The results showed that the oil production cost function in a situation with secondary recovery has a lower stock effect parameter than compared to that of the natural depletion situation. This implies that the marginal production cost dependency on cumulative production decreases after secondary recovery implementation.