Optimization of Seismic and Drilling Decisions for Value Maximization in Oil Exploration

1. Value of Information and other Decision Analytic Techniques for Optimization of Seismic and Drilling Mark Cronshaw SPEE Denver January 13, 2010 Gustavson Associates

2. Introduction • Optimal drilling and seismic choices depend on • Probability of success (presence of hydrocarbon in commercial quantity) • Value of the prospect if it is successful • Cost of drilling • Cost of seismic • Accuracy of seismic

3. Key Ideas • Decision trees promote intelligent discussion of alternatives and optimal choices • Can assess the value of information before it is gathered and analyzed • Potential cost saving: avoid unnecessary data gathering • Potential time saving: avoid unnecessary data gathering • Information has value only if it might change a decision

4. Example -Base case assumptions • Probability of structure = 10% (with commercial hydrocarbon) • Cost of seismic = $2 million • Dry hole cost = $10 million • Completion cost = $2 million • Value of prospect if successful = $60 million (excluding well cost)

5. Possible outcomes • Drill dry hole without seismic • Cost = $10 million • Drill successful well without seismic • Net value = $60 (success) - $10 (dry hole cost) - $2 (completion cost) = $48 million • Drill successful well after doing seismic • Net value = $60 (success) - $10 (dry hole cost) - $2 (completion cost) - $2 (seismic cost) = $46 million • Drill dry hole after doing seismic • Cost = $10 (dry hole) + $2 (seismic) = $12 million • Abandon prospect after doing seismic • Cost = $2 million

6. Sequence of decision models • Drill without seismic • Perfect information about structure • Provides an upper bound on the value of seismic • Imperfect seismic information • Accounts for false positives and false negatives • Compare drilling with and without seismic • Uncertainty about value of success

7. Summary – Without seismic • Base case: Better to not drill • High success value: Better to drill • High probability of success: Better to drill • Value of perfect information = $4.8 million = Maximum willingness to pay for seismic • If seismic will cost more than this, then • Do not do it • Do not become involved with the prospect

8. Summary - With seismic (1) • Base case: • Prospect is not attractive • It is not worth doing seismic! • Medium success value • Prospect is attractive • If seismic indicates promise , then drill • If seismic does not look promising ,then do not drill • Promising seismic increases the probability of success • Discouraging seismic reduces the probability of success • High success value • Prospect is very attractive • Better to drill without doing seismic!

9. Summary - With seismic (2) • Sensitivity to probability of structure: • Qualitatively similar to success value • Medium probability of structure • Prospect is attractive • If seismic indicates promise , then drill • If seismic does not look promising ,then do not drill • Promising seismic increases the probability of success • Discouraging seismic reduces the probability of success • High probability of structure • Prospect is very attractive • Better to drill without doing seismic!

10. Extensions • Can incorporate additional uncertainty • Success value • Dry hole cost • Completion cost • Seismic cost • Can explicitly model success case cash flows

11. Conclusions • Optimal decision-making about drilling and seismic depends on costs, benefits and uncertainties • It is not always optimal to do seismic • Decision-making is simple to model • Relies on subjective opinions about values & probabilities • It is easy to do sensitivity analysis • Decision analysis • Is easy to do • Reveals the optimal choice • Promotes intelligent discussion of alternatives • Is very useful at early stages of a project, with lots of uncertainty

12. Present Structure .23 Promising .35 Absent Seismic Result .77 Present Structure .03 Discouraging .65 Absent .97 Backup Slide – Flipping the Tree .08 .1 .02 .27 .9 .63 .08 .27 .02 .63