A Management View of Risk Assessment for Investment Decisions in Unconventional Resource Plays

J. Sherrick

I was asked to participate on this panel to discuss the key elements that need addressed to convince management to move forward with an investment in an unconventional play. While there is no unique solution to this task, this presentation is tailored to look at the key data as it is used for unconventional reservoir economic analysis.

In the last five years, it has become commonplace to broadly classify onshore exploration and production activities in the United States as either conventional or unconventional opportunities. The definition for what constitutes an unconventional play is pretty elusive, but for this discussion an unconventional reservoir will be defined as a small pore throat reservoir (“SPR”) where the in-situ hydrocarbon accumulation is within a source rock and it is dominantly controlled by capillary forces. The introduction of unconventional prospects into a company’s portfolio adds complexity to the risk matrix and this issue is further complicated as we move across the phase spectrum to include dry gas, gas/condensate, volatile oil and black oil unconventional reservoirs.

One of the major tenets of a long-term successful exploration program is the organization’s ability to consistently assess project risk and to properly incorporate this data into economic metrics that management can use to rank investment opportunities and ultimately select projects for capital allocation that meet the company’s hurdle rate and long-term strategic plan. Many companies and their decision makers have adopted some version of expected value theory to address the variability in different prospects for equilibration purposes. The terminology may vary by company, but all opportunities can be evaluated and reasonably compared by consistently assessing three components; 1) risk or discovery probability (“POS”), 2) prospect size or hydrocarbon accumulation and 3) the corresponding economics. Over the years, several well known authors have helped industry develop generally accepted methodologies to apply expected value theory in the exploration and production business.

Prior to 2003, exploration in virtually all basins and plays was dominated by the search for conventional hydrocarbon reservoirs. Management teams had become accustom to focusing on a few key variables like structure, reservoir, trap/seal, and source to assess risk and to accumulate certain data in a particular time sequence when evaluating conventional reservoirs for investment decisions. The vast majority of the conventional prospects were expected to have hydrocarbon accumulations that were the result of hydrocarbon migration generally controlled by buoyancy forces. With the introduction of unconventional reservoirs, the relative importance of some of key risks and uncertainties has changed as well as the decision nodes with respect to risk capital, timing and data requirements.

AAPG Search and Discovery Article #90186 © AAPG Geoscience Technology Workshop, Hydrocarbon Charge Considerations in Liquid-Rich Unconventional Petroleum Systems, November 5, 2013, Vancouver, BC, Canada