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Application of risk and decision analysis

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Managers and engineers alike are concerned about the bottom-line indexes net present value (NPV) and return on investment (ROI) and use these measures to aid in their decision-making, but they also worry about capital requirements and, in our business, reserves. NPV and ROI are the result of a complex interrelationship of the following:

  • capital investment
  • production, prices
  • operating expenses
  • schedule
  • fiscal terms
  • domestic taxes

Of course it is the uncertainty in these estimates that makes the “solution” of these problems and making a decision, based on the prediction, so interesting. It is also that uncertainty that makes these considerations ideal candidates for using risk analysis methods.

Several specific applications of Monte Carlo simulation include the following:

Some of the issues that must be addressed are:

  • choice of input distribution type
  • handling rare events, discrete vs. continuous variables
  • correlation among inputs
  • sensitivity analysis.

Noteworthy papers in OnePetro

Davidson, L.B. and Davis, J.E. 1995. Simple, Effective Models for Evaluating Portfolios of Exploration and Production Projects. Presented at the SPE Annual Technical Conference and Exhibition, Dallas, Texas, 22-25 October 1995. SPE-30669-MS.

Davies, G.G., Whiteside, M.W., and Young, M.S. 1991. An Integrated Approach to Prospect Evaluation. Presented at the Offshore Europe, Aberdeen, United Kingdom, 3-6 September 1991. SPE-23157-MS.

Joshi, S., Castanier, L.M., and Brigham, W.E. 1998. Techno-Economic and Risk Evaluation of an EOR Project. Presented at the SPE India Oil and Gas Conference and Exhibition, New Delhi, India, 17-19 February 1998. SPE-39578-MS.

Kitchel, B.G., Moore, S.O., Banks, W.H. et al. 1997. Probabilistic Drilling-Cost Estimating. SPE Comp App 12 (4): 121–125. SPE-35990-PA.

Linjordet, A., Nielsen, P.E., and Siring, E. 1997. Heterogeneities Modeling and Uncertainty Quantification of the Gullfaks Sor Brent Formation In-Place Hydrocarbon Volumes. SPE Form Eval 12 (3): 202-207. SPE-35497-PA.

Mishra, S. 1998. Alternatives to Monte-Carlo Simulation for Probabilistic Reserves Estimation and Production Forecasting. Presented at the SPE Annual Technical Conference and Exhibition, New Orleans, Louisiana, 27-30 September 1998. SPE-49313-MS.

Moore, K.S., Cockcroft, P.J., and Prasser, R. 1995. Applications of Risk Analysis in Petroleum Exploration and Production Operations. Presented at the SPE Asia Pacific Oil and Gas Conference, Kuala Lumpur, Malaysia, 20-22 March 1995. SPE-29254-MS.

Ovreberg, O., Damaleth, E., and Haldorsen, H.H. 1992. Putting Error Bars on Reservoir Engineering Forecasts. J Pet Technol 44 (6): 732-738. SPE-20512-PA.

Peterson, S.K., Murtha, J.A., and Roberts, R.W. 1995. Drilling Performance Predictions: Case Studies Illustrating the Use of Risk Analysis. Presented at the SPE/IADC Drilling Conference, Amsterdam, The Netherlands, 28 February –2 March. SPE-29364-MS.

Shivers III, R.M. and Domangue, R.J. 1993. Operational Decision Making for Stuck-Pipe Incidents in the Gulf of Mexico: A Risk Economics Approach. SPE Drill & Compl 8 (2): 125-130. SPE-21998-PA.

Siring, E. 1994. A System for Estimating Uncertainties in Hydrocarbon Pore Volume. Presented at the European Petroleum Computer Conference, Aberdeen, United Kingdom, 15-17 March 1994. SPE-27568-MS.

Spouge, J.R. 1991. CRASH: Computerised Prediction of Ship-Platform Collision Risks. Presented at the Offshore Europe, Aberdeen, United Kingdom, 3-6 September 1991. SPE-23154-MS.

Wiggins, M.L. and Zhang, X. 1994. Using PC's and Monte Carlo Simulation To Assess Risk in Workover Evaluations. SPE Comp App 6 (3): 19-23. SPE-26243-PA.

Wisnie, A.P. and Zhu, Z. 1994. Quantifying Stuck Pipe Risk in Gulf of Mexico Oil and Gas Drilling. Presented at the SPE Annual Technical Conference and Exhibition, New Orleans, Louisiana, 25-28 September 1994. SPE-28298-MS.

Wright, J.D. 1997. Actual Performance Compared to a 20 Year Old Probabilistic Reserve Estimate. Presented at the SPE Annual Technical Conference and Exhibition, San Antonio, Texas, 5-8 October 1997. SPE-38802-MS.

External links

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See also

Risk and decision analysis

Monte Carlo simulation

Decision tree analysis