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Abstract

AAPG Bulletin, V. 92, No. 10 (October 2008), P. 1373-1392.

Copyright copy2008. The American Association of Petroleum Geologists. All rights reserved.

DOI:10.1306/06040808070

I would rather be vaguely right than precisely wrong: A new approach to decision making in the petroleum exploration and production industry

Reidar B. Bratvold,1 Steve H. Begg2

1Department of Petroleum Engineering, University of Stavanger, Stavanger 4036, Norway; [email protected]
2Australian School of Petroleum, University of Adelaide, SA 5005, Australia; [email protected]

ABSTRACT

This article addresses the need for a holistic, integrated approach to assessing the impacts of uncertainty on oil and gas investment decision making. We argue that this cannot be accomplished effectively by just adding a capability to deal with uncertainty to classical, comprehensive, and rigorous models of all the components that contribute to an investment decision evaluation. Furthermore, we suggest that such an approach, even if feasible, is not desirable. Instead, we propose the concept of a holistic and probabilistic approach embedded in a decision-support system. This holistic approach has two major components. One is a technology component that integrates a variety of evaluation and decision-making tools. The second component is a modeling philosophy that fully recognizes the breadth and magnitude of uncertainty. It involves trading off some technical precision and detail for a more complete, accurate, and rigorous assessment of the impacts of uncertainty on the investment decision-making process. The main elements of such a system are simplified component models for each domain; a Monte Carlo simulation engine; and a modeling language for customization, incorporation of interdependencies between components, implementation of decision logic, and updating information as a result of learning. We illustrate how such a system identifies which uncertainties impact the decision the most, values the acquisition of information (data, technical analysis), and encourages flexibility in forward plans to mitigate and/or exploit uncertainties. Further applications are for the optimization of development plans, real options valuation, and the generation of consistent, risked cash flows for input to portfolio analysis. The application of such a system results in a true value-driven focus to the work of multidisciplinary asset teams through its ability to integrate the technical and business aspects of decisions.

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