Optimal Appraisal Well Location Through Efficient Uncertainty Reduction And Value Of Information Techniques

Abstract

Abstract Successful exploration, efficient appraisal, and profitable extraction are the three phases of any E&P project; each in turn is dependent upon the prior. However, efficient appraisal of newly discovered resources sets the stage for maximizing project profitability and managing risk. The goal of an efficient appraisal program is to achieve maximum reduction in uncertainty with minimal cost. The more certain a company is regarding the size and scope of a particular project, the better decision it can make on its development case selection, the greater the possibilities for downside risk mitigation, and the more efficiently it can manage its entire development portfolio. The end of the appraisal period occurs when further uncertainty reduction would not materially effect the principle development decisions, or at the point at which the downside project risk becomes acceptable to the company. Specific appraisal locations should typically be selected on their ability to provide the greatest overall reduction in project uncertainty. Project uncertainty is tied directly to the variance of the outcome distribution and can be summarized by the uncertainty range, which utilizes the commonly understood distribution descriptors. An understanding of the difference between discrete learning events and population sampling learning is critical to the estimation of uncertainty reduction. Potential appraisal locations will contribute to a reduction in uncertainty given either failure or success. Competing appraisal locations may be compared through their propensity for uncertainty reduction using standard value of information techniques (VoI). This quantitative method provides an assessment of the relative value of uncertainty reduction of competing or prioritized development locations, and may be extended within a multi-prospect situation to rank competing prospects within a commonly constrained business opportunity. Introduction The post-discovery appraisal effort abounds with opportunity for efficiency. Optimal choices for appraisal well locations and knowing when to end the appraisal phase of a project will not only create the maximum value for the organization, but will provide the most efficient path to proved resource. Demirmen (1996, 2001) has pointed out the opportunity for the use of value-of-information techniques to rank preference amongst appraisal opportunities. He also points out that under or over-appraisal erodes economic value. This author agrees and extends the argument to a decision context for both single and multiple prospect objectives. One of the most difficult dilemmas faced by appraisal personnel is where to locate the next well. Teams are frequently dry-hole phobic stating that the project "can't afford to have a dry appraisal well". A frequent result of this approach is a virtual twinning of the existing discovery, or minimal step-out, which provides little if any reduction in uncertainty and necessitates further drilling to determine materiality. Security of activity has taken precedence over security of business. Appraisal activities must be distinguished from exploration and development activities. Appraisal has its own set of rules and objectives. In order to appraise there first needs to be a successful exploration effort. Exploration "success" is the establishment of a minimum quantity of producible resource. It is the acknowledgement that sufficient resource is present and deemed producible that would tempt a responsible owner to proceed with further appraisal or development. As such the basic risk elements of container (reservoir, vertical seal, and lateral seal) and contents (source, timing, and migration) are present. Exploration risk is no longer of concern, but size uncertainty abounds. Successful exploration creates uncertainty. Appraisal activities reduce uncertainty as a primary objective. Development activities, though still contributing to uncertainty reduction, have a primary responsibility for commercial extraction and management.