Stochastic Analysis of Resource Plays: Maximizing Portfolio Value and Mitigating Risks

Abstract

Abstract This paper outlines a method for applying stochastic representations of key macro-economic parameters and risks in evaluating the portfolio value of resource plays. Stochastic pricing, costs forecasts, and regulatory uncertainties are often neglected or improperly applied when evaluating what are typically considered to be ‘low risk’ resource opportunities. Portfolio allocation and project development timing may be critically dependent upon these macro-economic variables, particularly given the long production life and operationally intensive nature of many resource opportunities. The techniques described in this paper will allow corporate planners and E&P executives to better leverage their opportunity inventory and ensure resource play development plans are in alignment with stochastic pricing or other macro-economic forecasts. A model of a typical E&P portfolio with numerous resource plays will be used to demonstrate the basic methodologies and the insights made possible through application of these techniques. This will include analysis of leasing options, pilot project evaluation, development timing and pacing options, and portfolio balance under various macro-economic conditions. The characteristics of project level analysis will be contrasted to the decisions and insights made possible via a holistic portfolio based approach.