Risk Analysis

In the Oil and Gas Industry, risk analysis is the attempt by industry to quantify the range of outcomes of real world events by means of mathematical models of the real world. In the real world of multiple economic decisions that industry must contend with every business day, there are multitudes of externalities, known and unknown, that act upon real world events. These externalities are in general called risk and uncertainty. The Oil and Gas Industry tries to measure, quantify, and account for risk and uncertainty using stochastic and statistical methods. The drilling of an oil or gas well is an uncertain venture--there are plenty of oil and gas producers that will attest to this fact. The usual method of evaluating an oil and gas drilling prospect is to first make a determination of the amount of hydrocarbon reserves that are to be found by the drilling of a well or a series of wells. If this prospect well is near other wells producing from the same target formation, one might be able to say, if the geology is similar, the prospect well will recover sellable hydrocarbons or reserves in an analogous quantity to the producing wells of the existing fields. If the above analogy can be assumed, a petroleum engineer can determine the estimated recoverable reserves (EUR) for each of the analogous wells or fields. Then using statistics the engineer can further determine the average EUR for the sample of analogous wells or fields along with a statistical property of the sample called the variance and standard deviation. The variance and standard deviation is a measure of the dispersion of the individual items in a distribution about the mean of the distribution. Table 1 is an example of how the average and standard deviation of a sample distribution of EURs can be determined. In some analyses of drilling ventures, a simple statement of the expected reserves to be found and maybe a range (a high expected value and a low expected value) of reserves is sufficient. However, a more sophisticated analysis would say that the expected reserves is the average or mean of the sample analogous wells, that the sample had a range of reserves, and that the standard deviation of the sample is some calculated value (6). At this point, the expected value of the reserves or mean and the low/high range quantities could be used to generate economic profiles of the proposed drilling venture. Very often, an economic profile of a drilling prospect based on the expected reserves is all that is presented to prospective participants. Something is still missing from the analysis: there has been no addressing of the risk associated with drilling the well with the expected reserves stated.