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Evolution of E&P Risk Analysis


Risk Analysis of Petroleum Exploration and Production ventures arose in the 1970s and 1980s to counter chronic underperformance of the Exploration sector; its adoption by the Production sector expanded rapidly after about 1996. Major advances since then depended on use of high-speed personal computers, company-consistent assessment software and practices, training of multidisciplinary professional staff and executives, and management of E & P as a portfolio of uniformly assessed ventures. In practice today it combines long-standing and evolving principles of statistics, economics, and utility theory, with more recent advances in petroleum geology, seismic, petroleum engineering, and cognitive/decision theory. Risk Analysis methods are now routinely applied to exploration plays and prospects, as well as appraisal and development projects, involving both conventional and unconventional reservoirs. Pioneering work in this emerging field was carried out and published by professional staff employed by Shell, Exxon, Arco, Gulf-Chevron, BP-Amoco, ELF-Total. and Cities Service. Later contributions from professionals at Texaco, Mobil, Unocal, Conoco, Marathon, and Statoil improved our understanding and applications. The key to widespread Industry adoption was development of 1) a sound procedural methodology “friendly” to geoscientists and engineers; 2) easy-to-use software implementing the methodology; and 3) guidance by expert geoscientists and engineers on central coordination teams. The main function of E & P Risk Analysis has been to temper unrealistic project expectations caused by industry overoptimism and overconfidence, which are rooted in various forms of cognitive bias that negatively affect our decision behavior. Resulting best practice today detects and limits biased estimates, and links creative geoscience-based prospecting, objective assessment of opportunities, and consistent risk analysis of evolving project stages. Six practical methods are now routinely used to detect and limit bias in assessing E & P ventures: 1) Probabilistic estimating of constituent project parameters, 2) Reality-checks of parameter estimates; 3) Use of appropriate and documented distribution shapes for reservoir parameters; 4) Employing crowd-sourcing methods for estimating chances of geologic success or failure; 5) Managing E & P as a Portfolio; and 6) Calibrating and improving project evaluations through routine performance-tracking of all significant ventures.