Decision Making in the Presence of Geological Uncertainty With the Mean-Variance Criterion and Stochastic Dominance Rules

Abstract

Summary At the heart of petroleum reservoir management (PRM) resides the challenge of selecting the best project from a group of feasible candidates in the presence of geological uncertainty. The challenge is particularly relevant in low-oil-price investment environments where many upstream projects are economically marginal and must be optimized. Companies are now more cautious. Investors are aware that they should consider not only the rewards of the projects but also their risks. For these reasons, the selection of projects to be implemented in the field should consider the geological risk and the capacity of the companies to tolerate it. In this paper, we introduce a decision-making model for active geological-risk management. The model is consistent with the utility theory framework and combines the mean-variance criterion (MVC) and stochastic dominance rules (SDRs) to guide the selection process. Two examples in the context of steam-assisted gravity drainage (SAGD) are presented.