Resolving Reservoir Uncertainty to Create Value

Abstract

Abstract Technology application focuses upon acquiring knowledge to reduce the uncertainty surrounding large capital investments in exploration and production. In practice, the industry makes incremental investments that exploit the increasing knowledge base for the asset, such as an exploration lease or a newly discovered field. Reservoir characterization reduces the uncertainty surrounding the development of a field by gathering and interpreting data from many interrogatory tools. The acquisition of that knowledge cannot be valued readily by traditional discounted cash flow (DCF) analysis and this has caused considerable problems for both the suppliers and users of technology. A new financial tool called Real options analysis is evolving which estimates the value of acquiring a knowledge base or developing a new technology. The value recognized by Real options reflects management's flexibility to reduce the uncertainties inherent in discovering and producing hydrocarbons. Real options analysis is a decision and valuation approach that estimates the net present value of managing uncertainty. When the uncertainty of a financial outcome is large and the time to resolve the uncertainty is sufficiently long, the value of a real option can be large. Mobil is extending Real options analysis to manage technology applications and optimize investment relative to resolving uncertainties. This article describes extensions made to the analysis technique for valuing a technology application. The methodology is illustrated with the application of integrated reservoir characterization techniques to reduce uncertainties in recoverable volume and well productivity. The Real options analysis indicates that a maximum value benefit in reducing reserve's uncertainty can occur at high expenditures. The maximum is a function of project's estimated NPV (with uncertainty), characterization analysis time, and the cost of delay. P. 347