OTC 15080

Exploration Risk Management

James MacKay / Rose & Associates LLP

Copyright 2003, Offshore Technology Conference

The reservoir specific concerns are associated with the
This paper was prepared for presentation at the 2003 Offshore Technology Conference held in confidence that a reservoir capable of flowing at adequate
Houston, Texas, U.S.A., 5–8 May 2003.
rates will be encountered at the drill site. Adequate is defined
This paper was selected for presentation by an OTC Program Committee following review of
information contained in an abstract submitted by the author(s). Contents of the paper, as
as reasonable porosity, permeability, thickness and continuity
presented, have not been reviewed by the Offshore Technology Conference and are subject to such that the reservoir will sustain flow. The documentation
correction by the author(s). The material, as presented, does not necessarily reflect any
position of the Offshore Technology Conference or its officers. Electronic reproduction, of this assessment as well as the supporting prospect specific
distribution, or storage of any part of this paper for commercial purposes without the written
consent of the Offshore Technology Conference is prohibited. Permission to reproduce in print
and regional data become the beginning of the reservoir life
is restricted to an abstract of not more than 300 words; illustrations may not be copied. The cycle for the future field.
abstract must contain conspicuous acknowledgment of where and by whom the paper was
presented.
In addition to geologic confidence there must also be an
assessment of the uncertainty surrounding the size of any
Abstract
possible accumulation. The uncertainty is captured by
Exploration Risk Management is a consistent process for
separately assessing the range of area, thickness and
accurate quantification of forecasts and opinions to be used in
recoverable hydrocarbons per acre-foot. Each of these
an economic model for decision support. The successful
parameters is a function of a few to several subordinate
implementation requires both management and technical
parameters that can be assessed individually or as a group.
commitment. The process quantifies the probability and
When considering four different hydrocarbons: oil, gas,
resource range estimates for each project using an organized
condensate and solution gas the list of parameters can expand
method based on the statistics and the principles of the
to over twenty.
petroleum system. Management will then have a portfolio of
consistently and accurately assessed projects that will deliver
The entire process needs to be repeated for each significant
the predicted results.
zone that might be productive. Additional estimates are
required regarding the extent of dependency between zones.
Introduction
The zone data are then combined probabilistically to give the
The exploration risk assessment phase of the reservoir life
overall confidence and range of size for the prospect. Many
cycle is an opportunity to document both the prospect specific
prospects can be combined to address the potential of a play or
and regional understanding of the potential reservoir. Very
contract area. All of these estimates as well as the supporting
little may be known about the prospect specific reservoir
data are added to the reservoir life cycle database.
conditions but the regional conditions are analyzed in more
detail at this stage than at any other time in the life of the
When the prospect is drilled each prediction is compared to
reservoir. At this stage there are two primary questions: What
the actual result. If the well is successful a new resource
is the confidence that a hydrocarbon charged reservoir will be
range is assessed based on all the new data acquired. This
encountered at this location and what is the range of possible
assessment is added to the reservoir database in preparation
resource sizes that might be found in that reservoir? Both of
for the next stage in the life cycle: Appraisal.
these questions need quantifiable answers.
Exploration Risk Management Implementation
The responses are based on subjective estimates of each of the
The successful implementation of an exploration risk
critical elements in a petroleum system. I recommend
management process, defined in figure 1 and described in
assessing separately the confidence in hydrocarbon charge,
recent books, References 1 and 2, requires a corporate
reservoir performance, structural accuracy and seal integrity.
commitment and a dedicated implementation team.
The project team, often with the support of risk assessment
Management must communicate the corporate commitment to
experts, assigns a percent confidence to each of these
the process and insist that the implementation team review all
parameters. The opinions and comments of each assessor are
projects before funding will be considered.
recorded and discussed. Then a final consensus values are
assigned. The overall confidence in a geologic success at this
Before the team can start it must first acquire or develop the
site is the multiplication of each of these four assessments.
necessary tools and processes listed in figure 2 that will be
applied to all exploration projects. The tools usually consist of
excel programs that can calculate probabilistic resource
2 OTC 15080
estimates for each objective zone and then compile the zones
into an overall probabilistic estimate of resources for the well.
Robert Otis and Nahum Schneidermann published an excellent
example of a parametric solution to probabilistic reserve
calculations in the 1997 AAPG Bulletin, reference 3.
Multi zone excel tools usually consist of complex decision tree
models or Monte Carlo models that can incorporate the results
of each of several zones along with estimates of the
dependencies between zones. These results can then be
incorporated into existing cash flow models for project
analysis with the economic results posted in the corporate
prospect inventory.
The process starts with clear and well-understood set of
standards and clearly defined responsibilities of the dedicated
exploration review team and the prospect development team.
The review team should be a considered a technical support
team that assists the project team and reviews the method
applied to assure consistency with established standards.
Ideally the team consists of individuals with various technical
backgrounds including engineering, geology, and geophysics.
They can assist with peer review meetings by suggesting
technologies or techniques that can better communicate and
possible reduce the uncertainty or increase the confidence for
the project.
Estimating the Chance of Success
What is the confidence that a hydrocarbon charged reservoir
would be encountered at this location based on the elements
described in figure 3? The project team with the support of
the risk implementation team needs to quantify separately the
probability that there is:
1. Adequate source that has generated hydrocarbons and
adequate migration that can deliver the hydrocarbons to the
prospect.
2. A clearly defined structure to contain the
hydrocarbons.
3. Adequate seals or barriers to retain the hydrocarbons
and prevent degradation.
4. Adequate reservoir conditions in the prospect that
will allow production of the hydrocarbons (figure 4).
Each of these four elements of a petroleum system needs to be
discussed quantified and a consensus documented using
consistent definitions. Ultimately the confidence values for
each will be multiplied together as indicated in figure 5 to give
the overall confidence of geologic success for the prospect.
Typically the process starts with an overview of the regional
then prospect specific geology with each of the above
elements discussed in that order. Once the geology is
understood the actual quantification of chance is usually
postponed until the prospect resource potential has been
quantified.
Estimating the Range of Resource Potential
What is the range of possible resource size that might be found
in each reservoir? Once again, the project team with the
support of the risk implementation team needs to quantify
separately the range of:
1. Hydrocarbon filled area.
2. Net reservoir pay thickness.
3. Oil and gas productivity.
In some areas where extensive data and experience are
available these three parameters can be quantified directly in
the form of area, average net pay, and barrels per acre-foot or
MCF per acre-foot.
Typically as suggested in the Otis and Schneidermann paper,
Reference 3, more detailed estimates are required as listed in
figure 6.
The process requires an estimate of the range and not just a
single best guess value for each parameter. Typically for
exploration ventures these estimates can be made using
simplified assumptions about distribution shapes and estimates
of the 80 or 90 percent confidence ranges.
The above referenced paper (reference 3) recommends a
parametric combination of the means and variances of each
required parameter fitted to a lognormal distribution.
Occasionally but rarely with exploration projects more
precision is appropriate and Monte Carlo method can be
applied were each parameter could be uniquely defined using
various distribution shapes or histograms of existing data.
Area estimates usually consist of a range of uncertainty around
the maximum area of closure available and an estimate of the
uncertainty of the percent of that area that will actually be
filled with hydrocarbons.
The net pay estimates consist of estimates of average gross
reservoir thickness, net to gross ratio and corrections for the
various geometries of the hydrocarbon water interface as the
porous interval varies from thin to thick and small to large.
The most extensive but least volatile of the parameters
required are those associated with the hydrocarbon
productivity. Each of the four possible hydrocarbon types, oil,
gas, saturated gas and condensate need to be calculated in both
in place reservoir and surface conditions.
These parameters and the calculation are familiar to most
engineers. Be sure to include estimates of the range of
uncertainty for the percent oil verses gas cap and the amount
of inert gas in the total gas.
Once the fully probabilistic range of hydrocarbons is
calculated for the estimates as described in figure 7, the final
chance of success values can be completed. This is usually
done after the resource estimate because then there is a better
understanding of how the hydrocarbons are likely to be
distributed.
Combining multiple zones
The entire process needs to be repeated for each significant
zone that might be productive (figure 8). The zone data are
then combined probabilistically to give the overall confidence
OTC 15080 3

and range of size for the prospect. Many prospects can be

combined to address the potential of a play or contract area.
All of these estimates as well as the supporting data are added
to the reservoir life cycle database.

Additional estimates of the extent of shared risk or

dependency between zones are now required. Typically the
dependence is quantified for each of the five chance elements
discussed earlier. Intermediate steps of combining similar
dependent zones then combining grouped zones using
different dependencies may be required.

Predictive Accuracy Analysis

Successful predictive skill requires feedback. All projects
need to be compared to the predictions when the results are
known. This needs to be done at both the portfolio and project
level. At the portfolio level the total number of successes
(figure 8), the amount of resources discovered (figure 9) and
the estimated value of the resources should compare favorably
with the predictions. Significant deviations should be
investigated to determine if there has been a systematic error
or simply reasonable statistical volatility.

Individual projects can be reviewed in a post project review

meeting to give feedback on the original estimates of chance,
size cost and timing of activities. Improved accuracy will only
occur through a process of repeated trials with feedback.

Successful implementation of a Risk Management Process

including a commitment to the process, accountability for
delivering unbiased estimates, verification of predictions and
an adequate portfolio of activity should result in exploration
performance that meets corporate expectations (figure 10).

References:

1. Lerche, I. and MacKay, J. A., Economic Risk in

Hydrocarbon Exploration, Academic Press, New
York, New York (1993).
2. Rose, P. R., Risk Analysis and Management of
Petroleum Exploration Ventures, AAPG Methods in
Exploration Series, No 12, AAPG, Tulsa,
Oklahoma (2001).
3. Otis, R. M. and Schneidermann, N. “A process for
Evaluating Exploration Prospects” AAPG (July
1997) 1087-1109 AAPG Bulletin Vol. 81 No. 7.
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Figure 1: Exploration risk management

Exploration Risk
Management
• A consistent process for accurate
quantification of forecasts and
opinions…..
• …..To be used in an economic
model for decision support.
Figure 2: Risk assessment

Risk Assessment
1. Use of statistics to
improve estimates of SIZE
2. Use of probability to improve
estimates of CHANCE
3. Use PREDICTIVE
ACCURACY to improve
estimates and correct for bias
OTC 15080 5

Figure 3: Chance of success

The Chance Of Success

What is the probability that
1. The hydrocarbon charge exists
2. The structure exists
3. The seals exist
4. The reservoir exists
Figure 4: Reservoir performance

Reservoir Performance

Porosity
Permeability
Thickness
Continuity

Acceptable flow characteristics

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Figure 5: The chance calculation

The Calculation
HYDROCARBON chance
X SEAL chance
X RESERVOIR chance
X STRUCTURE chance
= Geologic chance

Figure 6: The different variables

The Different Variables

Area of closure Productivity:
Percent fill up Porosity
Net Pay: Water saturation
Formation volume
Gross reservoir
factor(s)
thickness
Recovery efficiency(s)
Net to gross ratio
Gas/Oil ratio
Geometry factor Condensate ratio
Percent gas cap
OTC 15080 7

Figure 7: The uncertainty in the reserve size

The Uncertainty in the

Reserve Size
1. Each parameter is entered with median
and 80% or 90% confidence ranges.
2. All the variables are combined using the
means and variances.
3. The resulting reserve mean and variance
is displayed as a distribution.

Figure 8: Multiple zones

Multiple Zones
1. The geologic chance and
uncertainty of size of each zone is
defined.
2. The extent of dependency for each
risk element is estimated.
3. The overall dependent geologic and
commercial size and chance for the
prospect is calculated.
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Figure 9: Predictive accuracy - chance

Predictive Accuracy - Chance

Cumulative Chance cumulative chance
cumulative success
0.5
2
16

14

12
number of successes

10

0
zo ne s

Figure 10: Predictive accuracy - size

Predictive Accuracy - Size

Cumulative Resources

1400
Cumulative Risked Resource
1200 cumulative resource discovered
0.5
2
1000
cumulative resource

800

600

400

200

0
zones
OTC 15080 9

Figure 11: The results meet expectations

The Results
A portfolio of
projects that will
meet the
predicted
objectives.