SPE-189134-MS

Economic Optimization of Water and Gas Shut-Off Treatment in Oil Wells

Amba Ndoma Egba, DPR/Emerald Energy Institute; Joseph A. Ajienka and Omowumi O. Iledare, Emerald Energy
Institute, University of Port Harcourt

Copyright 2017, Society of Petroleum Engineers

This paper was prepared for presentation at the Nigeria Annual International Conference and Exhibition held in Lagos, Nigeria, 31 July – 2 August 2017.

This paper was selected for presentation by an SPE program committee following review of information contained in an abstract submitted by the author(s). Contents
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Abstract
It is estimated that on the average, three barrels of water are produced for every barrel of oil. Billions of
Dollars are spent each year in treating unwanted water and gas production in oil wells. Water and Gas Shut-
Off (WGSO) treatment has helped to reduce cost and improve oil recovery in some cases, while in others,
this method has failed to economically recover the remaining oil in the reservoir. Economics drives the oil
and gas business because the objective is to take decision that will reduce cost and maximize profit. Any
decision that is made without this consideration, may be an exercise in futility. Therefore, detailed economic
evaluation as a diagnostic tool for WGSO treatment has become imperative.
Despite the technical appeal, WGSO schemes can also be related to games of chance. Company has
to decide whether to risk the money or not since it is not certain whether there will be a simultaneous
increase oil and decrease in water/gas production. There is absolutely no 100% guarantee of success
because the justification for the selection of any WGSO treatment method will be based on the probable
incremental hydrocarbon production. Some water and gas control treatment can guarantee substantial
production increase while others could be less successful. This introduces some degree of uncertainty,
making WGSO treatment a risky venture. So, the quantification of risk and uncertainty is necessary.
Though the optimal decisions in water and gas shut off application differ from company to company, the
objective however is to obtain a condition under which the marginal and total revenue from water shut off
will be equal to the marginal and total cost of the operation. To Optimize WGSO application in oil wells,
we must determine the production rate that maximizes its total profits.
Against this backdrop therefore, an economic model is developed that is used to evaluate water and
gas shut-off candidates. This model incorporates Monte Carlo simulation and risk analysis on different
reservoir parameters, incremental recovery and oil price to optimize WGSO applications. It allows for the
determination of the probability distribution function for the different economic indicators that will help in
ranking WGSO opportunities.

Introduction
For any given well, there is a definite volume of oil that can be produced economically ceteris paribus.
As oil fields mature, rapid production decline occasioned by the encroachment of excessive water or gas
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production may occur in some or all the wells. These water or gas production are undesirable because
they lead to corrosion, sand production and flow assurance issues, making the well to reach economic
limit without producing the ultimate recovery. As a result of these, there are loss of reserves, pre-mature
shut in and abandonment of oil wells, in addition to the huge cost of treating and handling large volumes
of water or gas. With occasional decline in oil prices resulting in reduced revenue for exploitation and
development of hydrocarbon, industry stakeholders desirous of maintaining reserves were compelled to
look for contemporary water or gas shut off techniques so as to improve production from excessive water or
gas producing wells. This effort has paid off with the innovative water or gas shut off technologies available
today.
The first step to solving excessive water production is to determine the source, the second is to decide the
type of water control system to be used (Novotny, 1995). Excessive and unwanted gas or water production
can come from many sources as stated by; Economides (1994), Chan (1995), Bailey et al (2000). These
sources include; casing, tubing or packer leaks, coning, cusping, channel flow behind casing as a result
of poor cement conditions, Moving oil water contact, induced fracture, faults, water encroachment and
gas breakthrough. Various techniques have also been proposed to evaluate these sources ((Economides
et al, (1994), Bailey et al (2000), Chan (1995), and Novotny (1995)). These are; Production logging,
temperature and spinner logs, radioactive, tracer and noise logs, oxygen-activation-based water free level
logs, diagnostic plots and matrix flow evaluation techniques. After evaluation of the water or gas source
and proper identification of candidate well, the appropriate water or gas shut off method can be applied
(Kabir et al, 1999).
Several methods of shutting off excessive water or gas in oil wells have been developed; Dahl et al, 1992;
Chukwueke et al (1998); Bailey, 2000; These methods can broadly be classified into two groups: mechanical
and chemical (Joseph and Ajienka, 2010), and they range from, cement slurries, Bridge plugs, sand plugs,
straddle packers, expandable tubulars, particulate solids, resins, foam, micro mix cements to water soluble
polymers and gels. The methods have technically been used successfully to reduce unwanted water or gas
production in oil wells. However, these methods have not helped in some cases to economically recover the
remaining oil in the reservoir because not all wells are good candidates for water or gas shut off treatment
from an economic perspective. Companies use different economic benchmarks to measure the success of
WGSO operations. Most base their yardstick on increased oil rate, while others on reduction of water or
gas production only (Farooqui and Al-Rufaie, 1998, Dwyann et al, 2008, Karthick and Michael (2016)).
There is little consideration to the production and decline mechanism, cost and other economic indicators.
Unless substantial oil is produced to pay for the cost of treating and handling large volumes of water or gas,
it could be uneconomic. Therefore, economic considerations determine applications and detailed economic
evaluation is sine qua non to any WGSO project.
In this paper, a model is developed that integrates production, economics, risk and uncertainty with
optimization in evaluating WGSO treatments in oil wells. Production model uses decline analysis and
curve fitting technique to fit the production decline of a candidate well. Economic model used the Net
Present Value (NPV), Internal Rate of Return (IRR), Profitability Index (PI) and Long Run Marginal Cost
(LRMC) as economic indicators. Monte Carlo simulation integrating uncertainty and risk analysis in oil
price, production volumes, and well operating costs were incorporated. The objective is to maximize NPV,
IRR, PI and minimize LRMC, treatment cost. Economic optimization is achieved when optimal production
rates, price and cost are established. The model process flow is shown in fig. (1) below:
SPE-189134-MS 3

Figure 1—Model Process Flow

Decline Curve Model

Oil production will decline over time as a result of depletion and loss of reservoir energy or such factors
as encroachment of water or gas in an oil well. Decline curve analysis (DCA) is an emperical technique
that uses real production data in evaluating declining production rates and prediction of future production
performance of a well or field. The common equations used for decline are the ones developed by Arps
(1945) which shows the rate at which oil production from a well declines over time. This is related by the
equation (1) below:

(1)

q is the production rate, t is time, dq/dt is the rate of change of production with time, b is the decline rate
measured per day, per month or per year. d is a constant that is determined from production data and is used
to characterize the decline into three types; Exponential, harmonic, and hyperbolic declines. When d = 0,
Eq (1) reduces to exponential decline and when d = 1, Eq (1) reduces to harmonic decline. When 0 < d<
1, Eq (1) leads to a hyperbolic decline model. The hyperbolic decline model is more general, the other two
models are creations of the hyperbolic decline. For exponential case in which d = 0, the following equation
is used to model the decline:
(2)
qi is the initial production rate while qt is the production rate at time t. The decline rate b is modeled by
the following equation:

(3)
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For a hyperbolic case, in which 0 < d< 1, Eq (1) is integrated to yield the production rate given as follows:

(4)

(5)

The harmonic is a special case of hyperbolic decline in which d = 1. The production rate qt and decline
rate b is given as follows:

(6)

(7)

Decine curve analysis is still widely used in the petroleum industry for more than half a century and have
proven to be a very satisfactory method of forecasting future rates of oil and gas production (Seba, 2008).
Decline curve analysis is selected as the production model in which WGSO treatment will be evaluated.
Before any water or gas shut off treatment is carried, the production decline of each well is modelled. A
curve fitting method using non lease square method is used to fit the production decline of a particular well
before water or gas encroachment. The fitted curves are either hyperbolic, harmonic or exponential. These
fitted curves are then used to predict the future performance and production decline after water or gas shut
off. The procedure involve the calculation of the qi/qt whre qi = initial production and qt= production before
water encroachment in each well. Different values of d are then used to calculate b so as to determine the
decline characteristics of each well where the curve fitting technique is used.
A computer program develped with MatLab was used to perform this operation. This program has the
capacity to fit the decline to the well data on different d values using the curve fitting techniques in MatLab.
The program is shown in the Appendix. From here, the predicted all rates can be determined and economic
analysis applied.

Economic Model
The economic model for WGSO treatment is developed using incremental or differential economics. The
concept of differential economics have been expounded by (Seba (2008) and Mian (2011). incremental
economics is used to determine if the benefit of additional expenditures can be justified. There are two types
of cash flow in this model. The first is do nothing (a baseline case), a forecast under existing condition. The
second reflect the cash flow as a result of additional investment (base case+). According to Seba (2008),
Well workovers, supplemental recovery, delay commissioning, accelerated projects, additional drilling,
bottlenecking and project expansion are examples of differential or incremental economics. Water or gas
shut off fall into this category. In differential economics, the two cash flows are analysed as any other cash
flow.
On an annual basis, Net cash flow is the summation of all revenue, positive or negative after deduction
of expenses such capital expenditures, royalties, taxes on a year by year basis (Seba 2008). It is given as
follows:

(8)

The net cash flow after water or gas shut off using a treatment cost Ct is given in the equation below:
SPE-189134-MS 5

(9)

Where;
NCFBWGSOt = Net cash flow before water or gas shut-off, $
NCFAWGSOt = Net cash flow before water or gas shut-off, $
 qo1 = oil rate before water or gas shut off, bopd
 qo2 = Oil rate after water or gas shut off, bopd
 qw1 = water rate before water or gas shut off, bwpd
 qw2 = water rate after water or gas shut off, bwpd
 qg1 = Gas rate before water or gas shut off, MMSCFD
 qg2 = Gas rate after water or gas shut off, MMSCFD
Hcw = Water handling cost, $/bbl
Hcg = Gas handling cost, $/bbl
Po = oil price, $
ROYt = Royalty, fraction
OOXt = other cost, $
TAXt = Proportion of taxable income received by host government, $
Ct= Treatment Cost for water or gas shut-off
VOPXt = Variable Operating expenditure, $ which is cost associated with the well at the beginning of well
life. The cost can be modelled as follows:
(10)
Where;
VOPXt = Variable Opex, $
WOC = well operating cost, $/bbl
 q = oil production in barrels
 ir = Inflation rate
So, the NPV model for water or gas shut off for incremental production over a period from t=1 to t=n
will be represented as the net cash flow before minus the net cash flow for a do-nothing case follows:

(11)

If an exponential decline (d=0) is fitted, NPV is calculated based on the exponential decline oil rate as
follows:

(12)

For hyperbolic (0<d<1), the NPV is

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(13)

For harmonic (d=1), the NPV is

(14)

The internal rate of return will be calculated from NPV as:

(15)

The profitability Index (PI) which is a dimensionless tatio is given as (Mian, 2011)

(16)

The long run marginal cost (LRMC), the total cost per unit of incremental production required to produce
and deliver a barrel of oil into the market is given as (Mian, 2011),

(17)

The criteria here is that if the LRMC is below the prevailing oil price, then it's uneconomic to produce.
However, NPV will be maximised when the LRMC is minimum. When comparing the base case (do-
nothing) to base case+ (carry out a water or gas shut-off), the lower the LRMC, the better the investment.
All these analyses are subject to the economic limit of the well because production will naturally decline
to a point in which it cost more to produce the hydrocarbon than the hydrocardons are worth (Seba,
2008). Beyond this point, continuous production will be uneconomic. This is the economic limit in which
production yields no revenue sufficiently to pay for the cost of operation. At economic limit, oil production
yields no profit and production costs are equal to the cash flow from oil sales. Beyond the economic limit,
the net cash flow is negative. Our model incorporates the economic limit and shut down production beyond
the economic limit so as to maximize revenue and safe cost.

Simulation and Optimization Model

One of the greatest problems facing petroleum engineers is to determine the optimal production rate in any
workover operation given the uncertainties in reservoir properties, production forecasting and oil price. Such
problems are best solved by optimization in which the objective function is maximized or minimized subject
to some imposed constraints. The objective functions are the NPV and LRMC, the decision variables are
SPE-189134-MS 7

the the production volumes, oil price, treatment, water handling cost, gas handling cost, and well operating
cost. They are defined with probability distribution functions to incorporate risk and uncertainty while the
constraints are the declining rates and fiscal system. Mathematically, the model can be stated as;

Subject to;

Number of wells Wells ≤ Number of wells in the field

q2 ≤ decline rate (exponential, harmonic or
Oil Rate
hyperbolic)
Economic limit
Fiscals: Royalty, NDDC
Taxes; Petroleum Profit Tax (PPT)
Education Tax (EDT)

The ultimate objective is to find the feasible values of IRR, q2, Po, VOPXt, Ct that will Maximize NPV
and minimize the LRMC.

Process Flow
The process flow explains the steps in the model and the following are the assumptions. It is assumed that
proper identification and evaluation of water or gas shut off candidates have been done by the production
and reservoir engineer and that there are remaining reserves to be produced. The candidate well is declining
because of excessive gas or water production. Treatment design and implementation strategy are adequate
and all other technical considerations have properly been carried out. This model can then be used for
economic evaluation and optimization to advise on the economics of water or gas shut off operation. The
model can be used for a well or an entire field. The flowchart is shown in fig. 2.
Step 1: Input production data from candidate well, fit production data to declining rate and
establish the type of decline and generate a production forecast with the declining rate after
water or gas shut off. This done with a computer program in MatLab. The production forecast
is then exported to excel.
Step 2: Generate cash flows and determine incremental. Incorporate assumed fiscal system
and calculate NPV, IRR, LRMC, and PI.
Step 3: Integrate risk and uncertainty in the input variables by using probability distribution
functions.
Step 4: Run Monte Carlo Simulation
Step 5: Generate adjustable production rates and oil prices, impose contraints on the production
and fiscal system and run optimization. If an optimal solution is not found, the model adjusts
the production rates and prices until a solution is found. The solution is stored and the process
reapeated for another well.
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Figure 2—Economic Optimization Model Flowchart

The applicable fiscal system for our evaluation are;

Royalty = 20%
PPT = 85%
EDT = 2%
NDDC = 3%
The economic evaluation, risk analysis and optimization was carried out using using @Risk and
RiskOptimizer, a risk analysis and simulation software.

Example Case
The example case is used to show the application of the economic optimization model with a well in the
onshore Niger Delta that was treated for water and gas shut-off. This well came on stream in 1980 with
initial rate of 2000 bopd on bean 24/64″ reaching a peak rate of 4550 bopd. Significant water production
SPE-189134-MS 9

started in 1995 and the well continued to produce at an increasing water cut (up to 85 %). It was also noticed
that the GOR has increased to more than 6 × Rsi at variance with regulatory requirements. Last recorded
production rate was 500 bopd. Worried by this scenario, the well was prepared for a water and gas shut off
treatment to increase production. Reservoir and production engineers predicted that the well will produce
about 700 bopd after the treatment. The WGSO was successfully carried out at a cost of 1.2 million Dollars
(650,000 WSO +550,000 GSO). When the well was opened for production, it produced 586 bopd in line
with +/−10% of reservoir engineering prediction. After the treatment, the well continued to decline and was
shut in at a rate less than 100 bopd.

Economic Optimization and Evaluation

A decline analysis and curve fitting for this well indicates that the well was experiencing an exponential
declie decline (fig. 3). The predicted oil rates before and after the treatment were analysed using our model.
Optimization was carried out both for the base case (do nothing) and base case+ (carry out shut-off). Tab.
1 in Appendix shows the optimal production rates and net cash flows for the two scenarios. The oil price
was fitted with a triangular distribution ranging from 25$/bbl to 45$/bbl with a more likely value of 30$/
bbl. The constraints for the optimization are shown in table 2.

Figure 3—Decline for example well

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Table 2—Optimization Constraints for Example Case

From the results of the simulation and optimization, Base case (no WGSO shut-Off (fig. 4), base case
+ (fig. 5), the expected NPV of 821M$, IRR of 56%, PI of 1.134 for the base case was greater than the
NPV of -921M$, IRR of -24.46%, PI of 0.84 for the the base case+. The LRMC of 7.565 is less for the
base case than the base case+. This is confirmed from the simulation that the base case has a 95% chance
that the NPV will be greater than zero compared to a below 90% chance for the base case+. Optimization
summary are shown in Tab. 3 below:

Figure 4—Simulation of base case

SPE-189134-MS 11

Figure 5—Simulation of base case+

Table 3—Example Case Result Summary

The LRMC for the base case has a 90% chance to be less than 7 while it has a zero chance for the base
case+. From all indications, it was uneconomical to carry out the shut off operation. The base case scenario
was the prefered option and would have maximised revenue. This model can be used for a single well or an
entire field to ascertain the economic feasibility of carrying out a water or gas shut-off treatment.

Conclusion
1. Unwanted Water and gas shut-off can be an effective way of increasing oil production and maximizing
revenue. However, the success of these treatments depends largely on the economics of the operation.
2. This paper shows the economic optimization of water and gas shut-off treatment to maximize revenue
and minimize costs. Using Optimization, production is combined with economics and risk analysis in
evaluating WGSO candidates to avoid unnecessary expenditure and improve recovery.
3. Economics drives the oil and gas business. So, the selection of WGSO candidates should not depend
on technical considerations alone and unless there are sufficient volumes to pay for the cost of
12 SPE-189134-MS

treatment and well operations, it would be uneconomic. Therefore, economic optimization determines
applications and should precede any WGSO treatment.

Acknowledgement
The authors are grateful to the management of the Department of Petroleum Resources (DPR) and Emerald
Energy Institute, University of Port Harcourt, Nigeria for the permission to publish this paper.

Nomenclature:
b = Decline rate, per day, per month or per year
Ct = Treatment Cost for water or gas shut-off
Ct = Treatment Cost for water or gas shut-off
d = hyperbolic exponent
dq/dt = rate of change of production
EDT = Education tax
Hcg = Gas handling cost, $/bbl
Hcw = Water handling cost, $/bbl
Ir = inflation rate
LRMC = Long run marginal cost, $/bbl
NCFAWGSOt = Net cash flow before water or gas shut-off, $
NCFBWGSOt = Net cash flow before water or gas shut-off, $
NDDC = Niger Delta Development Levy
OOXt = other cost, $
OPEX = Operating cost
PI = Profitability Index
Po = oil price, $
Po = oil price, $/bbl
Po = oil price, $/bbl
PPT = Petroleum Profit tax
PV = Present Value, $
qg1 = Gas rate before water or gas shut off, MMSCFD
qg2 = Gas rate after water or gas shut off, MMSCFD
qi = initial oil production rate, bopd
qo1 = oil rate before water or gas shut off, bopd
qo2 = Oil rate after water or gas shut off, bopd
qt = oil production rate at time, t, bopd
qw1 = water rate before water or gas shut off, bwpd
qw2 = water rate after water or gas shut off, bwpd
ROYt = Royalty, fraction
ROYt = Royalty, fraction
t = time
TAXt = Proportion of taxable income received by host government, $
VOPXt = Variable Operating expenditure, $
WOC = Well operating cost, $/bbl

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SPE-189134-MS 13

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Appendix
Table 1—Optimal Production Rates and Cash flow
SPE-189134-MS 15

Computer Program for Decline Analysis

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