FOR UTP-GEOSCIENCES

UNDERGRADUATE USE ONLY.

NOT FOR REDISTRIBUTION.

QBB4014
May 2018 – Supplementary Topic

Week 5.5 – Why P90, P50, P10, Mean, Low, High etc?
Managing Uncertainty in Valuation
CASE EXAMPLES
• The Barings Bank debacle; in 1995, Nick Leeson, 28, from working class of Watford, England,
became general manager and head trader of Barings Futures Singapore.
• But due to a combination of Leeson's greed and overreaching ambition, and Barings' serious lack
of operations risk controls, the bank would soon collapse under a $1.4 billion debt. Barings PLC of
London was the oldest merchant bank in England at 233 years.
• Several layers below the top executives with poor operations risk controls allowed him to commit
frauds.
• Leeson was charged with forgeries and misrepresentations that he made to conceal unauthorized
deals while trading on the Singapore International Monetary Exchange (SIME). He served time in a
Singapore jail.

• 2004; Shell fined over reserves scandal.

• The Anglo-Dutch oil group Shell paid regulatory fines in the US and the UK over an oil reserves
scandal that has thrown it into turmoil. The company will pay $120m (£65.7m) to the US securities
and exchange commission, and £17m to the financial services authority.
• Shell said that it breached market abuse provisions related to the calculation of its reserves.
• The oil giant admitted it had overbooked proven reserves in its oil fields by 4.5 Billion barrels,
around 23% of its total. Hence wiped billions of British pounds off its market value. It
subsequently further downgraded its reserves a further three times.
RISKED & UNCERTAIN RESOURCE VALUES REQUIRE FAIR REPORTING

SEC & SPE PRMS RULES ON HYDROCARBON RESOURCES REPORTING

• The Security and Exchange Commission, or SEC, is a federal government
agency in the United States.
• recovering nation after the ravages of the stock market collapse of 1929.
• to enforce securities law and thereby regulate the stock exchanges in
operation in the country, enforcement on both individuals and
companies who have been deemed guilty of fraud or other violations
which involve a criminal charge.
• the major focuses are providing protection to those who invest, ensuring
that market trading is fair and efficient, and creating an environment that
encourages the formation of capital.

• The SPE Oil and Gas Reserves Committee (OGRC) released Guidelines for
Application of the Petroleum Resources Management System (PRMS) in
2011, that is updated to focus on using the 2007 PRMS to classify
petroleum reserves and resources.
• Represent a collaboration of the American Association of Petroleum
Geologists AAPG, the Society of Exploration Geophysicists SEG, the
Society of Petroleum Evaluation Engineers SPE, and the World Petroleum
Council WPC.
SPE PRMS (2007, 2011)
The Low, Best and High Estimates of potentially
recoverable volumes should reflect some comparability
with the reserves categories of Proved, Proved plus
Probable and Proved plus Probable plus Possible,
respectively.

"Best Estimate" is a generic expression be the closest to

the quantity that will actually be recovered from the
accumulation between the date of the estimate and the
time of abandonment.

If probabilistic methods are used, this term would

generally be a measure of central tendency of the
uncertainty distribution (most likely/mode, median/P50
or mean).

The terms "Low Estimate" and "High Estimate" should

provide a reasonable assessment of the range of
uncertainty in the Best Estimate.

Probabilistic methods estimated quantities should be

based on methodologies analogous to those applicable to
the definitions of reserves; therefore;
• at least a 90% probability (P90) that, assuming the
accumulation is developed, the quantities actually
recovered will equal or exceed the Low Estimate.
• In addition, an equivalent probability value of 10% (P10)
should be used for the High Estimate.
 MYM UTP FGPE OCT 2017

PROBABILISTIC UNCERTAINTY DISTRIBUTION PLOTS

Frequency Distribution Cumulative Frequency Distribution

(usually) histogram, curve (usually) curve

Probability plots are designed for

particular theoretical distributions
by transforming the scale of the
probability axis so that a given
distribution is represented by a
straight line. This is achieved by
introducing so called reduced
variable y, which is a transform of
F(x) and is linearly related to x. Log - probability plot
Values x of the random variable are
usually plotted on vertical axis.
Specially designed graph paper
which is ruled with vertical grid for
probabilities and horizontal grid for
data values is called probability
paper.
 FOR UTP-GEOSCIENCES
UNDERGRADUATE USE ONLY.
NOT FOR REDISTRIBUTION.

Linear Exploration Failure and Exploration Success Case with

Cumulative Log Probability of Prospective Recovery size distribution
(an example)

POS at mean

Pg anchor value

Chart after Peter Rose in AAPG Methods in Exploration Series, No. 12 in 2001
 MYM UTP FGPE OCT 2017

Concept of Value of Information VOI

For PROSPECT VENTURE DECISION Volumetrics PR Economics Weighted
NPV emv
High est (P10)
Generic Decision Tree Technique + $120 mm + $18 mm
Weightage
∑emv 0.15
+ $58 mm
Best est (P50)
Success emv 0.65
+ $80 mm + $52 mm
Value = Success case + (-) Failure case + $ 17.4 mm
POS = 30% 0.20
Drilling Outcome Low est (P90)
- $60 mm - $12 mm
Prospect emv
+ $ 3.4 mm (1-POS) = 70%
Prospect Drilling Decision Drill Well
based on option with Failure emv Exploration Cost
more positive value - $ 14 mm - $20 mm

Do Not Drill
emv = $ 0
LEGEND:
GEOSCIENCE ENGINEERING

Decision Node Volumetrics PR Economics

NPV
Chance Node POS (from Pg)
Dry Well Cost
Terminal Node Weightage