Terminology Explained: P10, P50 and P90

13 Dec 2016 Victor Borges 16

availability, Events, Maros, RAM analysis, Taro, Terminology Explained,

In today’s Terminology Explained: P10,

P50 and P90.
When working with Monte Carlo simulations, some parameters that show up
quite a lot are the P10, P50 and P90.

What are these parameters? Why are they so

important?
The large amount of data produced by statistical methods sometimes make it
difficult to effectively use its results in the decision-making process. As we
mentioned in our post about the Monte Carlo method, this methodology is based
on “simulating” potential scenarios. An example of its use in the oil and gas
industry is the estimation of potential lifecycle (i.e. a feasible representation of
the life of the asset) to predict asset performance. Sometimes, when running
models with a large variation, analysts will engage simulations that go beyond
1000 lifecycles. This number multiplied by the specified period required to
simulate the asset performance (i.e. platform useful life = 10-20 years) means
that we are effectively tracking tens of thousands of years of simulation.

The P10, P50 and P90 are useful parameters to understand how the numbers
are distributed in a sample. Let’s try to explain that using an example.

Consider the following sample (list of observations). They could represent

anything – oranges, bananas, production efficiency etc.:

1. 95
2. 95
3. 96
4. 95
5. 97
6. 93
7. 94
8. 95
9. 96
10. 94

There are several options to display this data. You could decide to group the
observations within a certain range and create a frequency table (i.e. how
frequently an observation appears in the sample). This is calculated by counting
the observations with a specific value and dividing by the total number of
observations (e.g. 93 appears one time in a sample which has ten observations
so its frequency is 10%):

Data Number Frequency

93 1 10%
94 2 20%
95 4 40%
96 2 20%
97 1 10%

The frequency can also be used to create the famous “bell” curve:

Normal distribution i.e. Bell curve

With this distribution, there is no need to have access to all the data points in the
sample to start the inference work. We can tell, by looking at the graph, that most
observations are around 95.
What is Cumulative Frequency and probability of
Exceedance and Non-Exceedance?
Another option to display this distribution is using a “Cumulative Frequency”
graph. This table is calculated by adding each frequency from a frequency
distribution table to the sum of its predecessors.
One will notice that you can start from either the lower observation values to
higher observation values or the opposite. So, we must introduce two new
concepts:

Probability of exceedance: If you start from the left (i.e. lower observation
values) of the bell curve to the right (i.e. higher observation values), you
are building-up a probability of exceedance curve.
Probability non-exceedance: If you start from the right (i.e. higher
observation values) of the bell curve to the left (i.e. lower observation
values), you are building-up a probability of non-exceedance curve.

So, considering our sample, if we are preparing a probability of exceedance

graph, we know that 97 appears 10% of the time and 96 appears 20% of the
time, so for a Cumulative Frequency distribution, we will have 96 associated to
30%. It means that 30% of the observations will exceed the value of 96.

Data Number Frequency Probability of Exceedance

93 1 10% 100%
94 2 20% 90%
95 4 40% 70%
96 2 20% 30%
97 1 10% 10%

Probability of Exceedance

Again, this graph adds up the frequency of occurrence as the value of the
observation decreases i.e. 30% of our observations will be equal exceed the
value of 96. This is what is called the probability of exceedance.

As mentioned before, another option is taking the opposite view – adding

frequency of observations that will not exceed a certain value of observation.

So, considering our sample, if we are preparing a probability of non-exceedance

graph, we know that 93 appears 10% of the time and 94 appears 20% of the
time, so for a Cumulative Frequency distribution, we will have 94 associated to
30%. It means that 30% of the observations will be equal or not exceed the value
of 94.

Probability of Non-Exceedance

Data Number Frequency Probability of Non-Exceedance

93 1 10% 10%
94 2 20% 30%
95 4 40% 70%
96 2 20% 90%
97 1 10% 100%
You should also note that, for the same distribution, the P10 for the probability of
exceedance is exactly the same as the P90 of the probability of non-
exceedance. Another useful notion refers to the first and last value of these
distributions. The first value for the Probability of exceedance and the last value
for the Probability of Non-exceedance will always be equal to the total for all
observations, since all frequencies will already have been added to the previous
total. Again, this distribution can be extremely useful when dealing with large
samples.

What about P10, P50 and P90?

Finally, in the P10, P50 and P90, the “P” stands for Percentile. The calculate
value will depend on the type of distribution you have chosen to create. For
example, if we decide to go for a probability of exceedance curve, when we state
that a distribution has a P10 of X, we are saying “in this distribution, 10% of the
observations will exceed the value of X”.

So, in our sample, P10 would be 96 – 10% of our observation will exceed the
value of 96. And P90 will be 94 – 90% of our observation will exceed the value of
94.

Note that it does not mean that the estimate has a 90% chance of occurring –
that is a very different concept. P50 is more likely to occur because it is closer to
the mean. For this sample of observations, our P50 would be 95 which is exactly
the mean (i.e. 95). There is a reason for this which is explained later in this
article.

What does that mean for us working in the oil and

gas sector?
Let’s try to give an example relating to the oil and gas industry.

We can never be sure exactly (this is an important word which is the core reason
of why we use probabilistic approach) how much crude oil is available for
production in the reserves. However, we can have a good estimate (another
important word). Geologists and Reservoir Engineers working for the oil and gas
industry have developed numerous methods and tools to calculate the potential
production and get estimates of production rates from oil and gas reservoirs to
obtain a high economic recovery.

The Securities and Exchange Commission (SEC) define the reserves and
resources estimates in terms of P90/P50/P10 ranges as:

“The range of uncertainty of the recoverable and/or potentially

recoverable volumes may be represented by either deterministic
scenarios or by a probability distribution (see Deterministic and
Probabilistic Methods, section 4.2).

When the range of uncertainty is represented by a probability

distribution, a low, best, and high estimate shall be provided such
that:

There should be at least a 90% probability (P90) that the

quantities actually recovered will equal or exceed the low
estimate.
There should be at least a 50% probability (P50) that the
quantities actually recovered will equal or exceed the best
estimate.
There should be at least a 10% probability (P10) that the
quantities actually recovered will equal or exceed the high
estimate.

When using the deterministic scenario method, typically there should

also be low, best, and high estimates, where such estimates are
based on qualitative assessments of relative uncertainty using
consistent interpretation guidelines. Under the deterministic
incremental (risk-based) approach, quantities at each level of
uncertainty are estimated discretely and separately (see Category
Definitions and Guidelines, section 2.2.2).”

The text gives us indication of what curve we should be using – actually

recovered will equal or exceed – it means we should be using the probability of
exceedance curve.

Translating all these terms, the amount thought to be in the reserves is generally
estimated as three figures:

Proved (P90): The lowest figure. It means that 90% of the calculated
estimates will be equal or exceed P90 estimate.
Median (P50): This is the median.
Possible (P10): The highest figure, it means that 10% of the calculated
estimates will be equal or exceed P10 estimate.

For example, if a geologists’ calculation estimates that there is a 90% chance

that an oil field contains 50 million barrels and another estimate says there is a
10% chance of producing another 20 million barrels in addition to the 50 million
barrels. So, we would refer to: