Introduction

The field of oil and gas economic evaluation requires a thorough analysis of the costs, risks, and
potential returns associated with oil and gas operations. A sensitivity analysis is an important
tool for evaluating the potential impact of changes in key parameters on the overall economic
viability of a project. This paper will explore the concept of sensitivity analysis in oil and gas
economic evaluation, discuss the types of sensitivity analysis, the methods and data used, and
provide examples of its application in the industry.
Oil and Gas Economic Evaluation
Oil and gas economic evaluation is the process of assessing the financial feasibility of extracting
hydrocarbons from a given area or well. Key factors that impact this evaluation include oil and
gas prices, production volumes, capital and operating costs, recovery rates, and taxes and
royalties. The primary goal of economic evaluation in this industry is to determine whether a
given project is profitable and worth investing in.
Sensitivity Analysis – The Concept
Sensitivity analysis is a technique used to assess the impact of changes in key variables on a
project’s financial outcomes, such as the Net Present Value (NPV) and Internal Rate of Return
(IRR). This analysis becomes crucial when there are significant uncertainties related to some key
parameters, and decision-makers need to identify how much adjustments in these parameters
would impact the project.
In oil and gas: Sensitivity analysis is a crucial aspect of oil and gas economics. It involves
analyzing how changes in various factors can impact the economics of a project. In the oil and
gas industries, sensitivity analysis allows companies to identify both potential risks and
opportunities associated with projects.
Sensitivity analysis typically involves varying one or more key parameters that can impact the
economics of the project. For instance, important inputs in a sensitivity analysis for an oil and
gas economics project may include the price of oil and gas, production profiles, and the cost of
production. Essentially, all of these inputs can impact a company’s revenues, costs, and overall
economic outlook.
The objective of sensitivity analysis is to evaluate how sensitive a project’s economic indicators
are to changes in key parameters.

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A good sensitivity analysis can provide the following benefits to the company performing the
analysis:
1. It allows companies to identify the most important economic inputs or assumptions,
which can help management make better-informed decisions.
2. It enables companies to model a range of scenarios based on alternative assumptions or
risks, which makes it more likely that the company can achieve its goals in different
economic environments.
3. By analyzing the sensitivity of key economic indicators, companies can identify and
manage the risks associated with their projects, which can help companies optimize their
resource allocation and investment decisions.
Overall, sensitivity analysis is a critical tool for analyzing economic projects in the oil and gas
industries. Most analysts consider sensitivity analysis one of the best methods for evaluating the
potential risks and opportunities associated with new oil and gas projects, particularly when
considering capital-intensive projects with significant risks and uncertainties.
Types of Sensitivity Analysis
This article will discuss two types of Sensitivity Analysis, namely, Parametric and Non-
Parametric Analysis, and their application in the oil and gas industry.
Parametric Analysis:
Parametric Analysis is a widely used sensitivity analysis technique that assesses the impact of
varying the input variables or parameters with a specified range and increment. The objective of
parametric analysis is to determine how the model’s output varies concerning its inputs. This
kind of analysis helps in identifying the input parameters that have the most substantial impact
on the model outputs. In other words, it is a statistical technique that determines a mathematical
relationship between the input and output data.
In the oil and gas industry, Parametric Analysis is widely applied to evaluate the uncertainty of
reservoir properties such as permeability and porosity, and the impact of production rates and
fluid properties. The result of Parametric Analysis provides the decision-makers with a
visualization of the model’s response and variability concerning the inputs. In the case of oil
production, the analysis can help to explore the likely reservoir life, impact of changing
operating costs, maximum oil production level, and revenue generated from the oil drilled.

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Non-Parametric Analysis:
Non-Parametric Analysis is a technique used to investigate the relationship between response
and input data, without assigning any specific form of a functional relationship between them.
Non-Parametric Analysis is less restrictive than Parametric Analysis, and it provides a flexible
method to quantify the correlation of input data with the model’s output without any assumption.
Non-Parametric Analysis works by ranking individual parameters and assessing the new models’
deviations.
In the oil and gas sector, Non-Parametric Analysis is used to identify the relative importance of
input parameters and to create a simple model based on this knowledge. It is commonly used in
well production forecasting, data prediction, uncertainty analysis, and understanding spatial
dependencies of reservoir properties. For instance, Non-Parametric Analysis can help to evaluate
the sensitivity of oil production to non-pecuniary factors such as the fluctuation of the oil price in
the market, different economic policies governing the sale of oil.
Conclusion:
In conclusion, Sensitivity Analysis is critical in the oil and gas industry, as it helps in making
informed decisions by analyzing the uncertainties of models of production and simulation.
Therefore, practitioners need to employ the various Sensitivity Analysis types, including the two
discussed earlier, to account for variations and understand the models thoroughly. This will lead
to a better understanding of the system’s processes and improvement in the productivity and
efficiency of the oil and gas industry.
Steps Involved in Conducting a Sensitivity Analysis In oil and gas industries:
In this text, I will discuss the steps involved in conducting a sensitivity analysis in the oil and gas
sector. These are:
1. Identify the objective of the analysis
2. Select the model
3. Identify the parameters or variables of interest
4. Define a set of scenarios
5. Vary parameters systematically
6. Assess the results
7. Identify areas of improvement

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Step 1: Identify the objective of the analysis
The first step in conducting sensitivity analysis is to define the objective of the analysis. This
involves asking questions about the problem, what needs to be optimized, and what the
constraints are. The objective of the analysis could, for example, be to determine the impact of
changes in crude oil prices on the profitability of a company.
Step 2: Select the model
In the oil and gas sector, there are several models that can be used depending on the problem.
This includes reservoir modeling, pipeline modeling, and economic analysis. Identify the
appropriate model and ensure that the model is representative of the problem being analyzed.
Step 3: Identify the parameters or variables of interest
Identify the parameters that will be varied during the sensitivity analysis. This could include, for
example, oil price, drilling cost, production volume, hydrocarbon composition, among others.
Step 4: Define a set of scenarios
Define a set of scenarios that will be used in the sensitivity analysis. This should include a base
scenario and various alternative scenarios, such as low and high price scenarios.
Step 5: Vary parameters systematically
Systematically vary the parameters as defined in the scenarios. This can involve changing one
variable at a time or using experimental design techniques to vary several variables at once.
Step 6: Assess the results
Assess the results of the sensitivity analysis. This can involve calculating key performance
indicators, such as net present value or internal rate of return, to determine the impact of varying
the parameters. It is important to evaluate the sensitivity of these results to the various
parameters being tested.
Step 7: Identify areas of improvement
With the results of the sensitivity analysis, identify areas of improvement or opportunities to
optimize performance. This could include reducing costs, improving production efficiency, or
modifying the model to account for additional variables.
Overall, sensitivity analysis is a valuable tool in the oil and gas sector for optimizing
performance, reducing risk, and identifying areas of improvement.

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Assumptions, Methods & Data Used in Sensitivity Analysis:
Assumptions are a key aspect of sensitivity analysis. Assumptions are statements that are
accepted as true and necessary for the purpose of analysis. In the context of the oil and gas
industry, assumptions may include factors such as initial capital investment, capital cost
estimates, production volumes, commodity prices, and operating expenses. It’s critical to
develop and document assumptions that are as realistic as possible to avoid minimizing the
potential impact of risks.
The methods used in sensitivity analysis include a variety of statistical and mathematical
techniques that attempt to answer questions about the degree to which changes in input
parameters or assumptions affect the output of the model. Some of these techniques are simple
such as one-variable-at-a-time, which involves changing one input parameter at a time and
observing the impact on the output. Another method is the design of experiments, where
multivariable inputs are used to create a more comprehensive estimation of the sensitivity of
model outputs. Structural analysis is another method that structures the relationships between
input and output in a model explicitly. Through structural analysis, analysts can quantify
different elements of change, such as elasticity and multipliers.
Data is a fundamental component of sensitivity analysis since it supports analysts in generating
interpretations that would reflect the business’s current condition. They must ensure that the data
used in the model is accurate and relevant to plausible scenarios; otherwise, the interpretation of
sensitivities may lead to mistaken conclusions. Data may include inputs, such as resource
reserves, production history and rates, and technological advancements, while inputs such as
stakeholder interests, regulatory requirements, and political stability. The quality and accuracy of
the data generate significant challenges to avoid findings that lead to inaccurate estimates of the
model’s performance.
In conclusion, sensitivity analysis is a useful tool for assessing the impact of Risk in Oil and Gas
Companies. Inputs from assumptions served to enter data into constructed models, while this
may add inherent assumptions it is useful in response scenarios. Sensitivity analysis enhances
commitment between stakeholders as through methodological approaches, assumptions become
a neutral ground between stakeholders. Overcoming challenges in assumptions, methods, and
data mitigates potential analysis shortcomings. Nonetheless, to add accuracy and relevance to
interpretations, stakeholders ought to choose sensitivity analysis cautiously.

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Sensitivity Analysis Software Tools Available in the Market:
Many software tools are available to support sensitivity analysis.
One popular option is PVTsim (petroleum fluid simulators), which primarily focuses on
sensitivity analysis of fluid composition, pressure, temperature, and formation volume factor.
Using this software, users can define different scenarios and predict how changes to various
parameters can impact the performance of oil and gas fields. The graphical interface makes it
easy for users to visualize and compare the results from different scenarios.
Another popular software package is Techlog by Schlumberger. This software is used for a wide
variety of applications, including geological, geophysical, and petrophysical data. It has a
comprehensive set of features for geomechanical and reservoir simulations, as well as
performance analysis to help engineers identify production challenges. Using data visualization
tools and sensitivity analysis algorithms, users can improve prediction accuracy and identify
risks.
ResOI by Halliburton is a newer software package that provides a range of modeling capabilities
for reservoir engineering and optimization. It includes a flexible graphical interface for
sensitivity analysis, making it easy to modify and compare different models. ResOI also supports
Bayesian optimization algorithms, which are useful for identifying optimal production targets
and reducing uncertainty.
In addition to these software packages, there are many other tools available on the market that
can be used for sensitivity analysis in oil and gas exploration and production. Regardless of
which package is chosen, it’s important to remain open-minded and prepared for the
unpredictable nature of the industry. Sensitivity analysis helps to take into account the
uncertainty inherent in oil and gas exploration and production, and the use of innovative software
can help to generate insights that drive better decision making.
Application of Sensitivity Analysis in Oil and Gas Economic Evaluation
Here are six applications of Sensitivity Analysis in Oil and Gas Economic Evaluation:
1. Evaluating Project Viability: Sensitivity analysis assesses how the viability of a project
changes based on fluctuations in key parameters such as oil prices, production volume,
and capital expenditure. It helps to determine the minimum threshold value of each
parameter that will make the project economically viable.

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 2. Optimal Decision Making: Sensitivity analysis facilitates rational decision making that
achieves the maximum benefits using the available resources. It helps in determining
whether to continue, suspend, or halt a project based on the projected Net Present Value
(NPV) or Internal Rate of Returns (IRR), which are significant parameters in Oil and Gas
economics.
3. Identifying Critical Parameters: Sensitivity analysis makes it possible to establish the
variables that impact a project most and identify the most dominant factor contributing to
the success of a project. These critical parameters can include the price of crude oil,
production volume, investment costs or reserve size.
4. Risk Analysis: Sensitivity analysis also helps assess the risk of a project by identifying
factors that could be detrimental to its economic viability. Risks associated with Oil and
Gas include political instability in the country of operation, security, exploration and
production failures, raw material price fluctuations and environmental issues.
5. Benchmarking: Sensitivity analysis allows comparison of different investment options
and identifies the optimal leasing or investment option based on cost-benefit analysis.
Sensitivity analysis can be conducted for different types of oil and gas projects to identify
similarities and differences across project types, industry sectors and geographic
locations.
6. Forecast Modelling: Sensitivity analysis helps to develop forecasting models that are
more robust and accurate at predicting future outcomes. These models are important for
making investment decisions and planning for the depletion of oil and gas reserves.
Sensitivity analysis also enhances the quality of the results and projections by reducing
the uncertainty associated with economic forecasts.
In conclusion, Sensitivity analysis can be employed across the Oil and Gas industry to evaluate
economic decisions relating to resource acquisition, production, processing and transportation.
With its ability to identify critical parameters and facilitate optimal decision-making, Sensitivity
analysis has become an indispensable tool for the industry.
Case Study Examples of Sensitivity Analysis in Oil and Gas Economic Evaluation
Two case study examples of sensitivity analysis in oil and gas economic evaluation are described
below.

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Case Study 1: Sensitivity Analysis of Reservoir Performance
In this case study, a company is evaluating the economic viability of a shale oil project in the
United States. The project has estimated reserves of 100 million barrels of oil and a development
cost of $5 billion. The initial economic model assumes a base-case oil price of $60 per barrel and
a recovery factor of 25%. The company performs a sensitivity analysis to evaluate the impact of
changes in the recovery factor on the profitability of the project.
The results of the sensitivity analysis show that the project is highly sensitive to changes in the
recovery factor. A 5% increase in the recovery factor increases the net present value (NPV) of
the project by $680 million, while a 5% decrease in the recovery factor decreases the NPV by
$780 million. This indicates that the profitability of the project is heavily dependent on the
project’s ability to extract a high percentage of the oil reserves. As a result, the company may
consider drilling additional wells or upgrading its technology to improve recovery rates.
Case Study 2: Sensitivity Analysis of Commodity Prices
In this case study, a company is evaluating the economic viability of a natural gas pipeline
project in Canada. The project has an estimated cost of $2 billion and is expected to transport
500 million cubic feet of gas per day. The initial economic model assumes a base-case natural
gas price of $3 per thousand cubic feet (Mcf) and a construction timeline of five years. The
company performs a sensitivity analysis to evaluate the impact of changes in natural gas prices
on the profitability of the project.
The results of the sensitivity analysis show that the project is highly sensitive to changes in
natural gas prices. A $0.50 per Mcf increase in natural gas prices increases the NPV of the
project by $400 million, while a $0.50 per Mcf decrease in prices decreases the NPV by $200
million. This indicates that the profitability of the project is heavily dependent on the price of
natural gas. As a result, the company may consider hedging its exposure to price fluctuations or
investing in other natural gas assets to diversify its revenue streams.
In conclusion, sensitivity analysis is a critical tool for oil and gas companies to evaluate the
economic viability of projects. By performing sensitivity analysis, companies can identify the
most important factors impacting profitability and make informed decisions about how to
improve the economic outlook of their projects.

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Challenges Faced in Application of Sensitivity Analysis and Recommendations for Proper
Use
In this paper, we will discuss these challenges and provide recommendations for the proper use
of sensitivity analysis.
One of the major challenges in the application of sensitivity analysis in the oil and gas industry
is the availability and quality of experimental data. The accuracy of sensitivity analysis results is
highly dependent on the quality of experimental data used in the analysis. However, acquiring
reliable experimental data in the oil and gas industry can be challenging due to the immense
costs involved in exploration and production activities. In addition, environmental and safety
concerns can limit the amount of data that can be collected in certain regions, making it difficult
to perform accurate sensitivity analysis.
Another challenge in the application of sensitivity analysis in the oil and gas industry is
computing power and time. Sensitivity analysis involves running a large number of simulations
to test the impact of different parameters on the output variables. This is a computationally
intensive process that can take a long time to complete, especially when dealing with complex
models. In addition, the available computing power can limit the number of simulations that can
be run, which can affect the accuracy of the sensitivity analysis results.
To address these challenges, it is important to ensure that the data used in sensitivity analysis is
of high quality and represents the actual conditions in the oil and gas industry. This can be
achieved by using reliable and well-calibrated instruments for data collection and analysis. In
addition, it is important to use efficient computing resources to reduce the time required to run
sensitivity analysis simulations. This can be achieved by using high-performance computing
systems or cloud-based services that offer scalable computing resources.
In conclusion, sensitivity analysis is an important tool in the oil and gas industry that can help
companies to optimize their production and exploration operations. However, challenges such as
the availability and quality of experimental data, and computing power and time can affect the
accuracy and reliability of the sensitivity analysis results. To ensure proper use of sensitivity
analysis, it is recommended that companies acquire reliable data, use efficient computing
resources, and be aware of potential limitations and assumptions associated with the analysis.

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iii. Anonymous, 1966. API Recommended Practice for Sampling Petroleum
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