BUSINESS SIDE OF GEOLOGY

By PETER R. ROSE

Estimate Should Be Big, Not Little

BUSINESS SIDE OF GEOLOGY ARCHIVES

'Surgical Theater' Probes Prospect Evaluation

A hands-on approach to learning about prospect evaluation will be one of the many short courses scheduled in June at the AAPG annual meeting in Denver.

"Prospect Evaluation 'Surgical Theater' and Workshop," a pre-meeting course slated June 2-3, will be taught by the current EXPLORER's "Business Side of Geology" columnist Peter R. Rose, along with Gary P. Citron and Jeffrey Brown, both with Rose and Associates in Austin, Texas.

The course, designed for geologists, geophysicists, engineers and managers, will give attendees a chance to observe and participate as multidisciplinary evaluation teams review and risk several case studies from the Rocky Mountains and offshore Gulf of Mexico.

Topics to be covered include:

Probabilities and distributions.
Dealing with uncertainty.
Estimating prospect reserves.
Expected value, geological chance factors, chance of success.
Understanding cash flow models.

The course is limited to 60 participants, and full-time student AAPG members are eligible for first-come, first-served slots.

"Prospect Evaluation" is one of nearly 20 short courses planned for both before and after the annual meeting.

Complete listing of courses, and for more information on this and all offerings

When you come up with an estimated P1 value for a prospect parameter, such as net rock volume, porosity or initial production rate, are you thinking about the top of the predictive range or the bottom?

Is your P1 estimate a big number or a little one?

Obviously, if several partners in a joint venture are using such conventions differently, severe misunderstandings are likely to occur!

Today, most E&P companies have adopted the convention whereby P1 refers to the top of the parameter's range, i.e., P1 is a big number, whereas P99 is a small one. But it hasn't always been so. Here's the background:

About 30 years ago, prospectors and engineers began to deal with the substantial uncertainties that attend most of the geotechnical parameters affecting prospect profitability.

Instead of single "best-guess" (deterministic) estimates, a few brave souls began to set predictive ranges, between a low-side forecast (= "minimum") and a high-side forecast (= "maximum").

At first, we didn't worry too much about whether a "min" was an absolute minimum, or a reasonable low-side guess, or something in-between. We didn't try to express our confidence in such estimates as probabilities.

Then it dawned on us that statistics could help here, so we started to assign probabilities (= confidence) to our geotechnical estimates. Now we could begin to measure our predicting abilities, by comparing estimates against actual outcomes.

We also began using cumulative probability distributions, rather than the frequency (probability density) form of display, because of their superior analytical capabilities. The cumulative probability form naturally encouraged us to talk about probability of a given outcome, or more (as well as the alternative, or less).

A few groups tried to set predictive ranges corresponding to one standard deviation -- the central 68 percent of the distribution. This made the statisticians happy, but left practical geoscientists and engineers frustrated, because this required them to sense and express values corresponding to 16 and 84 percent, which proved pretty awkward. Some tried to use 90 percent of the distribution, between P5 and P95.

Eventually, however, most companies agreed that the use of the upper and lower 10 percent seemed to be practical, and acceptable to most technical estimators, so the most common convention today is a predictive range of 80 percent.

The final question concerned whether to use the "greater than" or "less than" convention: Should P1 refer to a large value (or more) for which there was only a 1 percent chance of occurrence?

Or, was P1 a very small outcome (or less), for which there was only a one percent chance?

Statisticians seem to prefer the "equal to or less than" convention, arguing that it is faithful to statistical notation, and that some folks find it easier to associate large probabilities with large values, and small probabilities with small values. However, it is not incorrect to apply cumulative probabilities using the "equal to or greater than" format.

Most companies today have adopted the "more than" usage, so P1 is a very big outcome, whereas P99 is a very small result.

There are four compelling reasons why companies prefer the "more than" convention:

• "Proved" or "booked" reserves, as used by petroleum engineers, expresses high confidence (= "reasonable certainty") in some specified conservative reserves amount, or more. So the exploration expression of reserves would be compatible with the engineering expression.
• Explorationists, being keenly aware that companies and clients are particularly interested in the "up-side" potential of prospects, naturally focus on large-reserves outcomes, so the "or more" convention is more natural and appropriate.
• It eliminates the disturbing possibility that statistically naïve decision makers may be seduced into believing that, given a discovery, there is a 90 percent probability of finding the high-side (P90 case) outcome or more, rather than only a 10 percent chance.
• Commercial truncation of the reserves distribution is directly expressed as the proportion of the distribution that is of commercial size or larger, rather than as the more cumbersome (1-Pc) expression required by the "less than" convention.

So, it's best for P1 to refer to a big outcome, not a little one -- but it's always a good idea to verify the other outfit's usage before you start reviewing their prospect!

(Peter R. Rose is managing partner of Rose & Associates in Austin, Texas.)