Page 380 - Hydrocarbon Exploration and Production Second Edition

Risk Analysis 367

100

80

Probability of Failure = 70%
60
P(x)%

40

20

0
0 20 40 60 80 100 120 140
Reserves (MMstb)
Figure 15.1 Range of risked reserves for an exploration prospect.

is approximately 3% and the probability of exceeding 50 MMstb is approximately
15%. If a commercial threshold for development can be provided by the economists,
say 50 MMstb, then the probability of commercial success can be quoted, in this case
15% – this is sometimes referred to by the abbreviation POSc.
The simplest way in which to represent the risked reserves range is to multiply
the p90, p50, p10 reserves volume by the POS to quote the estimated p90, p50, p10
risked reserves.
The EMV of the project is most elegantly calculated by estimating the NPV of
the project for a discrete number of reserves volumes, typically the p90, p50 and p10
cases. These are then combined with the cost of exploration (say E) to calculate the
EMV, using the decision tree analysis approach introduced in Chapter 14.
The example below shows a decision tree for an exploration prospect, drawn up
in PrecisionTree s software, which is an add-in to Microsoft Excel. The cost of
exploration is $5 million, and the NPVs of a p90, p50, p10 oil and gas discovery are
$ 20, 100, 200 and 20, 60, 140 million respectively. The value of finding water is
of course zero. Each leaf on the end of the branches which follow exploration
includes the cost of exploration, and the p90, p50, p10 values have been weighted at
30, 40, 30% respectively. The POS for oil is estimated at 16% and the POS for gas
10%, so the POS of finding neither is 74%. The EMV of the prospect is $16.04
million, assuming the exploration cost of $5 million.
The blue numbers on the end of the leaves are calculated net payoffs and the
cumulative probability of occurrence (as determined by the software package). The
risk weighted outcomes include the assumed cost of exploration.
If exploration is successful, the next phase of the field life cycle would involve
considering appraisal of the discovery.