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The Practice of Risk Quantification and Portfolio Analysis in the Decision-Making of Offshore Prospects

Gabriel Alves da Costa Lima and Saul B. Suslick
State University of Campinas - UNICAMP, Campinas, Brazil

Risk analysis has been widely used in the petroleum industry in order to solve a number of problems. There are three fundamental steps in carrying out a risk analysis – modeling of uncertainty, choice of indicators of return and risk and correlation among assets. In many cases these three steps are not sufficiently investigated, in part because of the lack of available data to perform full-cycle of statistical analysis. In this paper, we go into details of the principles and practice of how to model the uncertainties, how to estimate correlation among different asset and some pros and cons of main indicators of risk and return used in the exploration business. A portfolio of three offshore deepwater prospects is used to illustrate the applications and expected results of this methodology, whose final result is the choice of some portfolio of the efficient frontier. The numerical analysis of these set of prospects indicates that the risk quantification and portfolio analysis is an important decision tool, but only if they are carried out under solid theoretical basis concerning the geological parameters. Poor or incorrect modeling of uncertainty, coupled with the common assumption of independence (zero correlation) and unreal risk and return indicators may lead to the choice of misleading decision.