Managing Uncertainty for Better Decision Making

Abstract

The very nature of the oil and gas industry requires us to explore many kilometers beneath the earth’s surface in search of hydrocarbons from accumulations that we will never see with our eyes. For the discoveries that we make, the industry must approve large sums of money to be spent now to develop an unknown volume of hydrocarbons that will be produced in the future and sold at an unknown price. The uncertainties in our industry invade every aspect of the full life cycle of every project. We try to eliminate uncertainty by acquiring new data while we continue to analyze the old data. Sometimes we pretend we have eliminated uncertainty by running economics on deterministic estimates. Reality is that there will always be an irreducible level of uncertainty and the best we can hope to do is to understand and properly characterize uncertainty. Only after properly characterizing uncertainty and incorporating it into our resources and economic evaluations can we expect to optimize our business decision making. Assessing uncertainty starts with the technical aspects of the subsurface geological elements and continues with estimation of resource volumes, development costs and timing, and through the full producing life of the asset. This presentation will focus on the risk analysis elements of taking a geologic model and characterizing the uncertainties into numbers. Uncertain numbers are represented as probabilistic distributions. Reality checks need to be made to ensure that distributions are reasonable with respect to their range and shape. History shows two common biases in assessing uncertainty are overconfidence (i.e. ranges too narrow) and optimism (i.e. mean too high). Examples will be shown of how to characterize uncertainty and the consequences of not characterizing it properly. We do not, or at least should not, make business decisions on the number of geologic discoveries. No one has ever heard an executive say that his company had a great year discovering over 100 MMBO of uneconomic, never to be developed oil. Executives get excited about approving developments with revenue generating production. So, we must also manage all the uncertainties that come with assessing the minimum commercial field size, forecasting development costs, time to startup, initial production and decline rates, oil and gas prices, and the list goes on. In fact, to make sure we are investing in the right opportunities, an economic evaluation of an undrilled exploration prospect must be based on the full life cycle of the potential future producing field. This fact is not always understood or appreciated, but it is necessary if portfolio management is to identify the optimum combination of opportunities to invest in. This presentation’s more holistic view of managing uncertainty hopes to complement the other presentations focusing on managing uncertainty in a specific domain.

AAPG Datapages/Search and Discovery Article #90354 © 2019 AAPG Asia Pacific Technical Symposium, The Art of Hydrocarbon Prediction: Managing Uncertainties, Bogor, (Greater Jakarta), Indonesia, August 7-8, 2019