Decision and Risk Analysis

Working on IOR projects, or projects in general, it is important to have a Decision and Risk Analysis (D&RA) tool in place. Information on petroleum volumes, prices, operating- and capital investment has to be communicated. Just as important are the uncertainties in the figures and the risk and upside related to the uncertainties.

To be able to talk together it is necessary to have a common language in place. A variety of methods for risk and decision analysis have been presented. The lack of one accepted method has caused many problems in the communication between people, and is a major bottleneck for IOR projects.

In order to improve the communication between people and also to improve quality of decisions, a tool for Decision and Risk Analysis is presented in this chapter. Several oil companies have recently used this method in presentations.

A five step D&RA methodology should be used in all IOR project evaluations. Some companies use more stages, with up to 10 being seen. The number of stages is not important as long as the same variables are considered in the full process. The stages that have to be included are:

Step 1 Framing the problem.

What is the problem?
What needs to be answered?
What information or data is needed?
Do we have any decision criteria?

Generate issues:
Critical concerns
Alternatives
Decisions
Uncertainties
Variables
Risks and potential upsides
Qualitative issues

Structure the problem:
Group and organise issues
Influence diagrams may be used
Decision trees to help focus and structure the problem

Plan the analysis:
Time contract
Who will do what?

Resources needed
Level of sophistication
Milestones

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Step 2 Quantify risks and uncertainties.

In this process we have to concentrate on quantifying the uncertainties for the variables that may be significant to the analysis. Uncertainties should be treated probabilistically (P10, P50 and P90 cases, or similar well-defined system). Narrow the list of variables for probabilistic assessment in order to simplify the analysis and provide focus.
List variables, risks, and chance factors.
Shortlist variables
Quantify variables, uncertainties and risks
Quantify chance factors
Empirical data and reality checks included
In this process we have to base the list of variables on judgement, experience, analogies and other information that is available. Each company has their own know-how and experience that goes into this process. In IOR projects the petroleum resources (production profiles) are critical variables. Reservoir simulation is not the first method we think about, but in some cases it is the best way ahead. Doing reservoir simulations should then, if used, also include sensitivity analysis to find and quantify the critical parameters.

Step 3 Perform sensitivity analysis.

Test the project's NPV (or other criteria) sensitivity to the uncertainties of each potential significant variable.
Calculate a reference case NPV with all variables at their P50 values
Calculate a NPV range for each potential significant variable
Tabulate the results, ordering the variables from largest impact to smallest (Tornado plot)
Analyse the results

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Step 4 Generate range of outcomes (Decision tree).

Construct the decision tree(s) based on the significant variables. Refining the skeleton tree or draft from Step 1 Framing, including the significant variables can do this.
Then, generate the economic outcome for each alternative.
Evaluate the branches of the decision tree
Calculate the expected values for the total range (whole tree)
Plot cumulative probability versus NPV
Validate the results.

Step 5 Apply decision criteria.

Evaluate the impact of qualitative issues.
Apply the decision criteria determined in Step 1 Framing, and make decision. Document the basis for decision.
Validate alignment with the company strategy.
Prepare an implementation plan.
Identify Start / Stop / Re-assess points

If this method, or a better one, could be made standard for the evaluation of IOR projects, the communication between the involved parties could be more efficient. All projects are exposed to risks and to upside potential. A D&RA exercise like this will make the communication between the licence owners and with the Authorities more efficient.

Acknowledgements
Ideas in this short description have been taken from DuPont and Strategic Decision Group (SDG).
Oddbjørn Melberg

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Updated : May 6, 1998