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Society of Petroleum Engineers Distinguished Lecturer Program
www.spe.org/dl

Economic and Risk Analysis Applied to Petroleum Engineering Recent Developments and Application Examples
J. C. Cunha

Society of Petroleum Engineers Distinguished Lecturer Program

www.spe.org/dl

Outline
Introduction Definitions Risk Analysis and the Oil & Gas Industry Application Examples Final Remarks

Introduction
Decision Analysis
1964 by Ronald Howard, Stanford University.

Decision analysis
Procedures, methods and tools
Identify, clearly represent, and formally assess important aspects of a decision situation.

Risk Analysis
Systematic use of information to determine how often specified events may occur and the magnitude of their likely consequences.* Quantitative Risk Analysis
It is a numerical approach to assess project risks.

*AS/NZS 4360:2004: Australian/New Zealand Standard on Risk Management

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Risk Analysis and the Oil & Gas Industry

First application for the oil industry:
Paul Newendorp, 1967 Application of Utility Theory on Drilling Investment Decisions

Risk and Uncertainty - Definitions

Risk and Uncertainty are commonly used as synonymous. Risk:
Possibility of suffering harm or loss; danger. Variability of returns from an investment. Potential impact (positive or negative) to an asset that may arise from some present process or from some future event.

Uncertainty:
The state of being unsure of something.
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Risk and Uncertainty - Definitions Risk is uncertainty based on a well grounded (quantitative) probability. Example

Misconception on the Use of Risk Analysis

Risk analysis will not eliminate risk in the decision making process.

Risk and Economic Analysis Applications for Petroleum Engineering

Examples:
Reserve quantification; Reservoir characteristics; Recovery factor; Expected production; Operations schedule; Budget; Etc.
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Risk and Economic Analysis Tools

Monte Carlo Simulation; Decision trees; Commercial Software; Engineering Economy; Economic Indicators; Database.

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Application Examples
Well Drilling Planning and Budget Heavy Oil Field Development
Reservoir Production Economics

Well Completion Time and Cost Estimate

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Well Drilling Planning and Budget

The challenge:
Two fields (GOM); Four wells (three areas); Ultra-deepwater; Deep wells.

Planning and Budgeting for Field Development.

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Basis for Analysis

For each well:
Summary of operations; Time and cost analysis; NPT analysis; Well Planning; Cost and time estimates.

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Summary of Operations
Summary by well section
Problems, possible solutions, lessons learned; Monte Carlo simulation to estimate for each well section:
Time; Total cost; Cost excluding NPT; Cost per foot x Feet per day.

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Simulation
Monte Carlo Simulation was performed:
For each well section, a value for cost per foot and feet per day was obtained; Using these values and the planned depth of the well section, it was determined the cost and period of time expected for the section; 1000 runs;

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Simulation (cont.)
Results of each run in one well section were added to correspondent results for the other sections; Table containing 1000 results for cost and time; Histograms for cost and time; Cumulative Probability Function (CDF).
1.0 0.9 0.8 0.7 0.6 % 0.5 0.4 0.3 0.2 0.1 0.0 60 62 64
65.8

66

68

70

72
71.9

74

76

78
78.0

80

82

84

86 Days

88

90

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Deliverables
Estimates of costs and time to perform operations; Sensitivity analysis to types of NPT; Easy adaptation to new realities; Partners relationship.

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Example 2 Offshore Heavy Oil Recovery

Objective:
Risk Analysis techniques to assess the uncertainty of NPV for an offshore heavy oil field during its initial development stage; Reservoir, Production, Economics.

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Methodology
Experimental Design

Factors

I, K, Kr, Area, Production Scheme

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Process: Flow Simulator

Response

NPV

Reservoir Model and Uncertain Parameters

Grid Top (m) 2004-12-08
File: AreaOpt_HorW User: jwalter Date: 2005-04-05 Z/X: 38.00:1

Grid 50x45x4
3,150 3,132 3,115 3,097 3,079 3,062 3,044 3,026 3,009 2,991 2,974

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Grid Top (m) 2004-12-08

K layer: 1
AreaOpt_HorW File: AreaExp_VertW AreaPes_HorW User: jwalter Date: 2005-04-05 1:84938 Scale: 1:84916 Y/X: 1.00:1 Axis Units: m

0.000.00 0.00 11,00 0 11 ,000 11,000

1.501.50 1.50

3.003.00 km km 3.00 km

EXPECTED AREA OPTIMISTIC AREA PESSIMISTICAREA

10,000 1 0,000

12,000 1 2,000 12,0 00

1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 14,000 0.000.00 1.001.00 2.002.00 miles miles 0.00 1.00 2.00 miles

3,134 3,150 3,116 3,118 3,132 3,102

8,000 8,00 0

6,000 6 ,000

4,000 4,0 00

2,000 2,00 0

9,000 9,0 00 9,000 7,000 7,00 0 7,000 5,0 00 5,000 5,000 3,000 3,00 0 3,000 1,00 0 1,000 1,000
1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 14,000

3,102 3,115 3,087 3,086 3,097 3,073 3,070 3,079 3,059 3,054 3,062 3,045 3,038 3,044 3,030 3,022 3,026 3,016 3,006 3,009 3,002
2,991 2,990 2,988

2,974

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Uncertainty Analysis
.. Area 1 P=0.2 .. Area 2 P=0.65 .. Prod. Scheme 1 P=0.25

.. Area 3 P=0.15 Prod. Scheme 2 P=0.25 Kr 1 16 P=0.0625 each Prod. Scheme 3 P=0.25 Prod. Scheme 4 P=0.25 Total of possible outcomes = 1728

Decision tree 3*4*16*3*3 = 1728

K1 P=0.2 K2 P=0.6 K3 P=0.2 Por1 P=0.15 Por2 P=0.65

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Por3 P=0.2

NPV (Net Present Value) uncertainty distribution, Horizontal Well

NPV unce rtainty distribution, Horizontal Well, EM V = US$9.9e8 EMV (Expected Monetary Value) = US$ 9.9 E8

0.14 0.12 0.1 0.08 0.06 0.04 0.02 0

2.68E+08 3.97E+08 5.26E+08 6.56E+08 7.85E+08 9.14E+08 1.04E+09 1.17E+09 1.30E+09 1.43E+09 1.56E+09 1.69E+09 1.82E+09 1.95E+09 2.08E+09 2.21E+09 2.34E+09 2.47E+09 2.60E+09 2.73E+09

US$

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Deliverables
Expected Monetary Value (EMV) for project; Easy sensitivity analysis; Consideration of:
Reservoir characteristics; Production scheme; Economic conditions.

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Example 3 Well Completion Time and Cost Estimate

GOM deepwater completion;
Rig factor; Efficiency factor; Cost factor.

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Completion Program
-----------------------------

Probabilistic Model
Detailed completion time study; NPT assumptions built in the model; Probability analysis approach.
Decision tree (commercial software). Sensitivity Analysis.

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Consequences Nodes Operation X

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Probabilistic Model
Decision Tree
116,734 events
DISTRIBUTION STATISTICS (days)
Mean Mode Std. Dev Min 2.5% 10% 50% 90% 97.5% Max
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126.84 109.72 12.45 108.08 108.08 111.50 124.75 145.50 154.48 243.15

Deliverables
Sensitivity analysis:
Very important due to rig uncertainty;

Estimates of costs and time; First oil.

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Final Remarks
Just the tip of the iceberg;

Useful tool for cost/budgeting; Allow better timing prediction; Gives information about chances of success and failures; Various applications; Recommended reading.
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CANADIAN HEAVY OIL ASSOCIATION

SPE/PS-CIM/CHOA SPE-97917-PP Uncertainty Assessment Using Experimental Design and Risk Analysis Techniques, Applied to Offshore Heavy Oil Recovery J.W. Vanegas Prada, J.C. Cunha and L.B. Cunha

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University of Alberta QUANTIFICATION OF RESERVOIR UNCERTAINTY FOR OPTIMAL DECISION MAKING by Alshehri, Naeem Salem
http://repository.library.ualberta.ca/dspace/bitstream/10048/833/1/Alshehri_Naeem_Spring+2010.pdf 33

PETROLEUM SOCIETY
CANADIAN INSTITUTE OF MINING, METALLURGY & PETROLEUM

Economic Analysis for Enhanced CO2 Injection and Sequestration Using Horizontal Wells P. Gui, X. Jia, J.C. Cunha, L.B. Cunha
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J. C. Cunha jcunha@petrobras-usa.com
Society of Petroleum Engineers Distinguished Lecturer Program
www.spe.org/dl

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