Simulation study of MER for gas--water reservoirs

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Abstract
Since federal law charges the Secretary of the Interior with determining MERs (Maximum Efficient Rates) for oil and gas reservoirs on selected federal lands, this report provides some insights into the technical consequences and shortcomings of one MER specification versus another. Six possible MER definitions are investigated by simulating the operation of several gas reservoirs in which encroaching water entrapment of gas provides a production-rate-dependent ultimate recovery function. The different definitions of MER involve maximizing, as a function of initial production rate, the quantities ultimate recovery, present value of net revenues, internal rate of return, and production rate, sometimes subject to the restriction that the internal rate of return be equal to or greater than an acceptable rate of return. The results suggest that the choice of an MER definition is extremely important because of its potential effects on the supply of natural gas. If the purpose of MER regulations is to conserve the resource, the definition that maximizes ultimate recovery subject to the internal rate of return being greater than, instead of equal to, an acceptable return was found preferable. The results suggest that interpreting MER as a maximum rate, as in a national emergency, can have negative repercussionsmore » on both recovery and economic returns. Defining MER as the production rate corresponding to the unrestricted maximum of the ultimate recovery function appears to be a technically unreasonable regulatory tool, except as a point of reference in the analysis of alternatives. The MER that maximizes present value of net revenues has merit, if the resource is priced properly, in that the resource and its contribution to national income are of greater importance than the increase of ultimate recovery. The purpose of the study is not to draw definitive conclusions on MER specifications but rather to provide insights to possible effects of alternative definitions.« less

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