Petroleum Reservoir Exploitation: Switching from Primary to Secondary Recovery

The petroleum recovery process has two potential phases: primary recovery, during which the natural drive forces the oil to the well bore, and secondary recovery, during which a producer uses artificial means to recover the resource. A producer may choose to switch from primary to secondary recovery if the desired ultimate output is more than can be obtained by exploiting the natural drive, or when the desired current extraction rate is larger than can be obtained by the natural drive. These decisions are affected by the interaction between geological, technical and market conditions. We formulate an investment and production model that incorporates the relationships between extraction rates, investment decisions and cumulative recovery, and investigate a two-phase dynamic optimization problem. We do so by defining and analyzing a more general optimization problem and applying the results to our model. The major findings relate to the timing and size of investment, the rate and duration of secondary recovery, and the optimal switching policies from primary to secondary recovery. We discuss each of these issues in detail, and outline and explain quantitative policy recommendations.