RERERERERESESESESESERRRRRVVVVVOIR EOIR EOIR EOIR EOIR ENGNGNGNGNGINEINEINEINEINEEEEEERING FRING FRING FRING FRING FOR GOR GOR GOR GOR GEEEEEOLOOLOOLOOLOOLOGGGGGISISISISISTTTTTSSSSSArticle 11 – Monte Carlo Simulation/Risk Assessment (cont.) by Ray Mireault, P. Eng. and Lisa Dean, P. Geol., Fekete Associates Inc.

The second article (Mireault and Dean, 2008)in the series on Monte Carlo simulationpresented an evaluation methodology forGeologist A’s development prospect. Thislast article extends the methodology toaddress Geologist B’s exploration prospect.

Geologist B interprets a hydrocarbonbearingreef at approximately 1,500 m depth fromthe available seismic data. Wrench tectonicsand strike-slip faults influence the structuralaspects of the play. Underlying shalerepresents a potential local hydrocarbonsource while overlying lime mudstones andcalcareous shales form the prospective caprock.

Core samples and outcrops show up to 30%porosity and are considered to reflect an insitu combination of intra-crystalline and vuggy(moldic) porosity. In situ primary porositymay / may not have been altered over time.

Organic geochemistry suggests a Type IImarine algal source charged the reservoirtarget with light (35-40° API) sweet oil.Reservoir reef and trap geometry areinterpreted to have been in place at the timeof oil generation.

Carbonate reef deposits tend to be oilwetsystems and this particular prospect isinterpreted to sit on basinal material thatprecludes the existence of a mobile aquiferunderlying the reef. Accordingly, watersaturation should approach residual values.Solution gas drive is anticipated with primaryrecovery in the range of 10 to 20%.

From the viewpoint of a Monte Carlosimulation, after an exploration prospect hasbeen discovered it will require developmentcapital to achieve production, just like anyother development prospect. Thus anexploration prospect is no more than adevelopment prospect with an additionalstep. Accordingly, the financial questions tobe answered become:

• Does the prospect present sufficienteconomic potential to proceed withdevelopment (assuming it contains thepostulated volume of hydrocarbons)?If so,

• How much additional (“risk”) capital isrequired to create a high (70%)probability of locating a hydrocarbon-

Figure 11.1. Oil exploration prospect.

bearing deposit (i.e., how manyexploratory wells need to be drilled)?

• Are the prospect economicssufficiently attractive to accommodateboth the development and explorationcosts?

DEVDEVDEVDEVDEVEEEEELOPMELOPMELOPMELOPMELOPMENNNNNT EVT EVT EVT EVT EVALALALALALUUUUUAAAAATIONTIONTIONTIONTIONCOMPONENTCOMPONENTCOMPONENTCOMPONENTCOMPONENTAs with Geologist A’s development prospect,Monte Carlo simulation was used tovolumetrically estimate the potential oil-in-place and recoverable oil volumes. GeologistB’s input parameter ranges are in Table 1.

As presented in the Volumetric Estimationarticle (Dean, 2008), the equations for oilare:

OOIP = A * h * * (1 - Sw) * 1/Bo

Recoverable Oil = OOIP * Recovery Factor

Figure 11.1 graphically presents the prospectpotential based on the foregoing inputparameters. Dividing the recoverable oil

Table 11.1. Geologist B’s input parameter ranges.

N

Figure 11.2. Oil exploration prospect number of wells required.

range by a seven-year rate-of-take providesthe initial annual production volume. Theinitial daily production rate assumes 350producing days per year.

Theoretical estimates of well productioncapability range between 80 and 320 m3/day.From the graphical comparison of Figure11.2, between 6 and 20 wells will probablybe required to achieve the initial targetproduction rate, with 12 wells as a most likelyvalue.

prospect from the individual capital costranges (Table 11.5).

At the time Geologist B’s prospect wasevaluated, the present-day (PV) value of acubic metre of production was estimated tobe between $25 and $38/m3. Based on theestimate, the expected PV before capital forthe prospect is between $62 MM and $798MM (Figure 11.3).

The development capital items and theirassociated capital costs at the time of theevaluation are summarized in Table 11.3.

Based on the estimate of between 6 and 20development wells and the cost estimatesfor an individual well (and dry hole) MonteCarlo simulation was used to generate therequired range of development drillingcapital (Table 11.4).

Table 11.2. Estimated volumes.

Table 11.3. Capital Cost Estimates (all values inmillions of dollars).

Table 11.4. Development Drilling Costs (all valuesin millions of dollars).

Table 11.5. Cumulative Development Costs (allvalues in millions of dollars).

Simulation was also used to generate thecumulative development cost profile for the

By inspection of Figure 11.3, the P90 limit oftotal development costs ($44.9 MM)intersects the PV before Capital Curve atabout the 6th percentile. Thus, there is inexcess of a 94% chance that the prospect, aspostulated to exist, would achieve a positiveNPV on the development capital. With thischance of success, most companies wouldgive the prospect further consideration.

EEEEEXXXXXPLORAPLORAPLORAPLORAPLORATION “RISK” CTION “RISK” CTION “RISK” CTION “RISK” CTION “RISK” CAPITAPITAPITAPITAPITALALALALALEEEEESSSSSTIMATIMATIMATIMATIMATETETETETESSSSSUnlike development capital, which alwaysgenerates some cash flow from subsequentproduction, exploration “risk” capital isspent without any potential for immediaterevenue generation. The majority of anexploration prospect’s risk capital consistsof:

• The up-front (land) cost for the right toexplore for hydrocarbons on specifiedacreage.

• Data acquisition (largely seismic) coststo infer the presence of prospect(s).

• Exploration drilling to locate ahydrocarbonbearing deposit.

• For offshore exploration, follow-updelineation drilling to confirm theminimum size of deposit needed fordevelopment.

Estimating “land” and seismic acquisition

Figure 11.3. Oil exploration prospect present value (PV) potential.

costs is generally straight forward. However,the exploration drilling cost estimate isessentially the number of consecutive dryholes that will be drilled prior to making adiscovery times the cost per dry hole.Exploration dri l l ing is evaluated as acomponent of the total “risk” capital because80 to 97% of the time, the outcome of anindividual drilling attempt is a dry hole.Fur ther, offshore exploration (anddelineation) wells are abandoned aftertesting, irrespective of what they encounter.For onshore evaluations, the successfuldiscovery well can be treated as the firstdevelopment well, as was done for GeologistB’s prospect, or as a “salvaged” explorationattempt.

Otis and Schneidermann (1997) present theconcept of geological success for anexploration well as “having a sustainedstabilized flow of hydrocarbons on test.” Theyestimate the probability of geologic success(Pg) as the product of the individualprobabilities of occurrence for four factorsas follows:

Pg = Psource * Preservoir * Ptrap * Pdynamics

where:Psource is the probability of mature

source rockPreservoir is the probability that reservoir

quality rock existsPtrap is the probability that a trap

existsPdynamics is the probability of appropriate

timing for migration andtrapping

A neutral assessment is assigned a value of0.5. Indirect supportive data increases theassigned probability of occurrence whilenon-supportive data reduces the estimatedvalue. The approach has the advantage that aneutral (50% probability) assignment for all4 factors yields a 6.25% probability ofgeologic success. The value compares withthe industry perception of about a 5% chanceof success on an exploration well.

Fekete has also successful ly used afiveparameter system to estimate the

Table 11.6. Five-factor system parameters.

probability of geologic success as follows:

Pg = Psource * Preservoir * Pstructure * Pseal * Pmigration

Note that the individual subscripts can becustomized to suit each evaluation. A neutral(50%) assignment for all 5 factors yields anoverall chance of geologic success of 3.125%.

In Fekete’s experience, either a four- or fiveparameter system can be used to evaluate aprospect. Which to use often comes downto which the earth science team that is doingthe evaluation is most comfortable with.Fekete has also evaluated prospects with aseven-parameter system (CCOP, July 2000)but when all seven parameters have a neutral(0.5) rating, the chance of geologic successis 0.8%. This does not mean that a seven-parameter system should not be used, butwhen it is, the evaluators must be aware ofthe consequence of additional multiplicationand adjust the input values relative to thevalues that would have been used in a four-or five-factor evaluation.

A five-factor system was used for GeologistB’s prospect and values estimated as shownin Table 11.6.

A 12% chance of success means there is an88% chance of a dry hole on the first drillingattempt. If the drilling sequence is a randomseries of events, as the number ofconsecutive drilling attempts increases, thechance that they wil l al l be dry holesdecreases. Table 11.7 shows the profile,assuming random events.

Table 11.7. Chance of Failure / Success.

In reality, we should learn something aboutthe prospect and play with each drillingattempt, so we may consider that less than10 wells are required for a 70% chance ofmaking at least one discovery. Or we maydecide that the drilling locations currentlyavailable to the company are not related andthe above table reasonably presents thechance with each successive attempt.

The consensus for Geologist B was that evenwith luck, a minimum of three dry holeswould be incurred before making a discovery.The more likely value was six (53% chanceof a discovery) but up to ten attempts couldbe required to tip the odds in the company’sfavour. An additional $10 MM was alsorecommended for addit ional seismicacquisition (Table 11.8).

The chance of realizing a positive NPV onthe capital investment can be read from thegraph. From Figure 11.4, upper and lowerlimits of the NPV curve have a value of zeroat about the 43rd and 63rd percentiles. Thechance of achieving a positive NPV on thecapital investment with Geologist A’sdevelopment prospect is between 37 and57%.

In Figure 11.5, the NPV = 0 axis is intersectedat about the 6th and 9th percentiles. IfGeologist B’s exploration interpretation iscorrect, there is between a 91 and 94% chanceof achieving a positive NPV on the capitalinvestment.

For any prospect, management needs toknow:

• The chances that at least the value ofthe capital investment will berecovered if the project proceeds.

• How much capital could be lost ifevents do not turn out as expected.

Figure 11.4. Gas development prospect NPV.

Table 11.8. Exploration Costs (all values in millionsof dollars).

Table 11.9. Cumulative Prospect Capital CostRanges.

From Monte Carlo simulation, total dry holecosts, total exploration costs, and cumulative

prospect capital cost ranges were estimatedas shown in Table 11.9:

With a total exploration and developmentcost of $60.7 MM and a PV before investmentvalue of $62 MM at the 90th percentile(Figure 11.3), the prospect has better than a90% chance of achieving a positive NPV (ifthe deposit really exists). When presentedwith this level of economic attractiveness,most companies would seriously considerpursuing Geologist B’s prospect.

PROSPECT FINANCIAL COMPARISONSFigure 4 summarizes the financial “picture”for Geologist A’s development prospect.Figure 5 presents Geologist B’s explorationprospect. The Max NPV curve is generatedby subtracting the P10 total cost value fromthe NPV before capital curve. The Min NPVcurve is similarly created from the NPVbefore capital curve less the P90 value fortotal capital costs.

• The potential gain in economic value ifevents do unfold as expected.

• total capital commitment required torealize production.

Which prospect would you invest in?

REFERENCESCanadian Institute of Mining, Metallurgy andPetroleum. 1994. Determination of Oil andGas Reserves, Petroleum SocietyMonograph Number 1, Chapter 6.

Canadian Institute of Mining, Metallurgy andPetroleum. 2004. Determination of Oil andGas Reserves, Petroleum SocietyMonograph Number 1, Chapter 6.

Coordinating Committee for Coastal andOffshore Geoscience Programmes in Eastand Southeast Asia (CCOP). 2000. The CCOPGuidelines for Risk Assessment of PetroleumProspects. July, 2000. 35 p.

Figure 11.5. Oil exploration prospect NPV potential.

Dean, L. 2008. Reservoir Engineering ForGeologists, Part 3: Volumetric Estimation.Canadian Society of Petroleum GeologistsReservoir, v. 34, no. 11, p. 20-23.

Mireault, R. and Dean, L. 2008. ReservoirEngineering For Geologists, Part 8b: MonteCarlo Simulation / Risk Assessment. CanadianSociety of Petroleum Geologists Reservoir,v. 35, no. 7, p. 14-19.

Otis, Robert M. and Schneidermann, Nahum.1997. A Process for Evaluating ExplorationProspects. AAPG Bulletin, vol. 81 no. 7. p.1087-1109