Value Change in Oil and Gas Production: V. Incorporation of Uncertainties and Determination of Relative Importance

Abstract

The influence of two fundamentally different types of uncertainty on the value of oil field production are investigated here. First considered is the uncertainty caused by the fact that the expected value estimate is not one of the possible outcomes. To correctly allow for the risk attendant upon using the expected value as a measure of worth, even with statistically sharp parameters, one needs to incorporate the uncertainty of the expected value. Using a simple example we show how such incorporation allows for a clear determination of the relative risk of projects that may have the same expected value but very different risks. We also show how each project can be risked on its own using the expected value and variance. This uncertainty type is due to the possible pathways for different outcomes even when parameters categorizing the system are taken to be known. Second considered is the risk due to the fact that parameters in oil field estimates are just estimates and, as such, have their own intrinsic errors that influence the possible outcomes and make them less certain. This sort of risk depends upon the uncertainty of each parameter, and also the type of distribution the parameters are taken to be drawn from. In addition, not all uncertainties in parameter values are of equal importance in influencing an outcome probability. We show how can determine the relative importance for the parameters and so determine where to place effort to resolve the dominant contributions to risk if it is possible to do so. Considerations of whether to acquire new information, and also whether to undertake further studies under such an uncertain environment, are used as vehicles to address these concerns of risk due to uncertainty. In general, an oil filed development project has to contend with all the above types of risk and uncertainty. It is therefore of importance to have quantitative measures of risk so that one can compare and contrast the various effects, and so that corporate decision-makers can use the information in a rational manner as they seek to enhance corporate profit. This paper provides such methods and measures of assessing risk.