Decision analysis for petroleum exploration - Hardcover

Newendorp, Paul D; Newendorp, Paul D.

Hardcover

ISBN 10: 0966440102 ISBN 13: 9780966440102

Publisher: Planning Press, 1998

Synopsis

This book is an introduction to the application of statistical decision analysis concepts to the analysis of risk and uncertainty in petroleum exploration investment decisions. Topics covered in the book represent a composite of current attitudes and practices throughout the world for analyzing drilling prospects, as well as several ideas and concepts published first in this book. Although decision analysis can be applied to any type of business investment decision the emphasis in this book is on the application of these new quantitative analysis methods to petroleum exploration decisions. The book will be of special interest to anyone involved in the evaluation of drilling prospects: petroleum geologists, engineers, geophysicists, and management decision makers. A mathematical or statistical background is not required to follow the practical, applications-oriented discussions.

About this title

About the Author

Dr. Paul Newendorp began his career in 1959 as a petroleum engineer for Pan American Petroleum Corporation (now Amoco Production Company). During two later educational leaves of absence he completed his MS and Doctorate degrees in Petroleum Engineering from the University of Oklahoma. In 1968 he developed a two-week short course on petroleum exploration economics and risk analysis. The course was based, in part, on his Doctoral research on decision theory and earlier industry work experience. For the next 21 years he traveled throughout the world teaching his short course. Entitled Decision Analysis for Petroleum Exploration, the course introduced many new concepts into the lexicon and accepted practice for analyzing drilling prospects. Included was his pioneering work on the use of Monte Carlo simulation for the quantification of exploration risks and uncertainties. His course, research, and numerous publications also brought into focus how established decision theory methods such as the expected value concept, decision tree analysis, and utility theory can be used to advantage in evaluating drilling prospects. This book was written in 1975 for use as a text for his course. During his career Dr. Newendorp was an active member of the Society of Petroleum Engineers. He served in various leadership roles and received numerous awards, including the SPE Section Service Award. In 1987-1988 he was appointed an SPE Distinguished Lecturer. He was also an associate member of the American Association of Petroleum Geologists.

Excerpt. © Reprinted by permission. All rights reserved.

From Chapter 1: Virtually all important business decisions are made under conditions of uncertainty. The decision maker must choose a specific course of action from among those available to him, even though the consequences of some, if not all, of the possible courses of action will depend on events that cannot be predicted with certainty. Decision analysis is a discipline consisting of various methods, techniques, and attitudes to help the decision maker choose wisely under these conditions of uncertainty. Decision making under uncertainty implies that there are at least two possible outcomes that could occur if a particular course of action is chosen. For example, when the decision to test a seismic anomaly with a wildcat well is made it is not known with certainty what the outcome will be. Even if the well is successful in discovering a large new oil field it is not entirely certain what the ultimate value of the reserves will be. In fact, petroleum exploration has frequently been given the dubious distinction of being the "classic" example of decision making under uncertainty. Decision analysis methods provide new and much more comprehensive ways to evaluate and compare the degree of risk and uncertainty associated with each investment choice. The net result, hopefully, is that the decision maker is given a clearer, sharper insight of potential profitability and the likelihoods of achieving various levels of profitability than older, less formal methods of investment analysis. The older methods of analyzing decision choices usually involved only cash flow considerations, such as computation of an average rate of return on invested capital. Thus, the new dimension that is added to the decision process with decision analysis is the quantitative consideration of risk and uncertainty and how these factors can be used in formulating investment strategies. The fundamental concepts used in decision analysis were formulated over 300 years ago (1654). However, the application of these concepts in the general business sector did not really become apparent until the 1950's. And it has only been in the last 5-10 years that decision analysis has been seriously applied to petroleum exploration decisions. Use of these methods and techniques in drilling decisions probably developed more by default than as the result of crusading efforts by a single person, group, or company. Reasons for this are quite evident in the industry-rising drilling costs, the need to search for petroleum in deeper horizons or in remote areas of the world, increasing government controls, etc. These stresses and strains became so critical that most petroleum exploration decision makers were no longer satisfied to base their decisions on experience, intuition, rules of thumb, or similar "seat-of-the-pants" approaches. Instead, they recognized that better ways to evaluate and compare drilling investment strategies were needed. Today it is the view of many decision makers that decision analysis offers these and other advantages over traditional ways of selecting drilling prospects. Hence the current interest in the application of decision analysis to petroleum exploration. Decision analysis is a multi-disciplinary science that has various other synonyms: statistical decision theory, management science, operations research, and modern decision theory. It involves aspects of many traditional areas of learning-economics, business, finance, probability and statistics, computer science, engineering, and psychology, to name a few. We will, of course, discuss all aspects of decision analysis in detail in later chapters, but for purposes of gaining an overview of the methodology we can summarize decision analysis as a series of steps: A. Define possible outcomes that could occur for each of the available decision choices, or alternatives. B. Evaluate profit or loss (or any other measure of value or worth) for each outcome. C. Determine or estimate the probability of occurrence of each possible outcome. D. Compute a weighted average profit (or measure of value) for each decision choice, where the weighting factors are the respective probabilities of occurrence of each outcome. This weighted average profit is called the expected value of the decision alternative, and is the comparative criterion used to accept or reject the alternative. The new parts of this approach to analyzing drilling decisions are steps C and D. The analysis requires that the explorationist associate specific probabilities to the possible outcomes (dry hole, or various levels of reserves). The quantitative assessment of these probabilities is frequently called risk analysis. Anyone who has attempted to assess these probabilities in petroleum exploration is undoubtedly aware that risk analysis is no easy task. Some have compared the "state-of-the-art" of risk analysis to the older, well documented profitability analysis by observing that we as a petroleum industry can compute a discounted rate of return to an accuracy of 50 decimal places; whereas we are fortunate if we can even estimate (guess?) the probabilities to the first significant digit! Risk analysis is, thus, a vital component in the broader discipline of decision analysis, and we will be devoting most of our attention in later chapters to discussions on how to quantify risk and uncertainty in the petroleum exploration context.

Edition details

• Publisher: Planning Press
• Publication date: 1998
• Language: English
• ISBN 10: 0966440102
• ISBN 13: 9780966440102
• Binding: Hardcover
• Edition number: 1
• Number of pages: 668