PETE 4051 Reserve Evaluation and Reservoir Management

Financial Accounting Probabilistic Reserves Assessment

Dr. R. G. Hughes

LOUISIANA STATE UNIVERSITY

A N D A G R I C U L T U R A L A N D M E C H A N I C A L C O L L E G E

Craft and Hawkins Department of Petroleum Engineering

Professional Ethics and Reserves Reporting

Financial Accounting (Grossly Oversimplified)

Net Income = Equivalent Barrels* Income per Barrel

* Gas is usually converted to equivalent barrels at a ratio of 6 MCF / STBO.

How is Income per Barrel Determined?

Income per barrel = Sales price p barrel p p per operating cost per barrel investment (or capital) cost per barrel

Known as DD&A rate calculated by K t l l t db investment proved reserves

Depreciation, depletion & amortization

The Potential Conflict of Interest when Reporting Reserves

Increasing proved reserves increases reported net income Reserve estimation is an interpretive process leading to almost qualitative values Stock analysts rely on reported income for buy/sell recommendations A trend toward awarding stock options and g p performance based compensation results in reserve estimates affecting the bottom line on managements paycheck!

Proved Reserves
Reasonable certainty

90% probability that amount recovered will equal or exceed the estimated value Economic conditions Operating conditions Government regulations

Economic under existing conditions

Supported by actual tests or production Fluid contacts are base upon the lowest known unless engineering data indicates otherwise Conforms to existing well spacing and regulations Improved recovery only considered if
successful pilot response to an installed program proven in the same or an analogous reservoir

Figures dont lie, but liars figure..

Probability

Source: unknown

Probability is a number between 0 and 1 which expresses the likelihood of an event.

Wont Happen Will Happen

0.25

0.50

0.75

After Capen, Rose & Clapp

Objective and Subjective Probabilities Examples

Objective
Th is a 50% chance of heads on a coin toss There i h fh d i t There is a chance of 1/36 of throwing a pair of sixes with two dice

Subjective
Th is a 2% chance the Saints will win the Super There i h h S i ill i h S Bowl There is a 25% chance that this prospect contains hydrocarbons

Probabilities
In our business, chances or probabilities are largely subjective, reflecting an individuals betting odds that a given event will occur. Common uses of statistics in the oil and gas business
Competitive bidding (lease sales, acquisitions) Prospect economics p Ranking of investment opportunities Reserve estimates Failure/reliability analysis Geostatistics
After Capen, Rose & Clapp

Addition Rule
If two events are mutually exclusive, the probability of one or the other occurring is the sum of their individual probabilities. Example: probability of a two or a five on the y The p roll of a die = 1/6 + 1/6 = 1/3

After Capen, Rose & Clapp

Multiplication Rule
If two events are independent, the probability of both occurring is the product of their individual probabilities. Example: The probability of 2 fives on the roll of two dice = (1/6) (1/6) = 1/36

After Capen, Rose & Clapp

Probability Distributions
A Probability Distribution is a collection of events and their associated probabilities covering every possible outcome of an experiment or course of action:
Experiment Possible Outcomes Probability (number of dots) Roll of 1 1/6 single die. 2 1/6 3 1/6 4 1/6 5 1/6 6 1/6
After Capen, Rose & Clapp

Probability Distributions
Roll f T di R ll of Two dice
Possible Outcome 2 3 4 5 6 7 8 9 10 11 12 Probability 1/36 2/36 3/36 4/36 5/36 6/36 5/36 4/36 3/36 2/36 1/36 Cumulative Probability 1/36 3/36 6/36 10/36 15/36 21/36 26/36 30/36 33/36 35/36 36/36

Probability Distributions
Roll f T di R ll of Two dice
Possible Outcome 2 3 4 5 6 7 8 9 10 11 12 Probability 1/36 2/36 3/36 4/36 5/36 6/36 5/36 4/36 3/36 2/36 1/36 Cumulative Probability 1/36 3/36 6/36 10/36 15/36 21/36 26/36 30/36 33/36 35/36 36/36

Histogram or PDF

Probability Distributions
Roll f T di R ll of Two dice
Possible Outcome 2 3 4 5 6 7 8 9 10 11 12 Probability 1/36 2/36 3/36 4/36 5/36 6/36 5/36 4/36 3/36 2/36 1/36 Cumulative Probability 1/36 3/36 6/36 10/36 15/36 21/36 26/36 30/36 33/36 35/36 36/36

CDF

Prospect Reserve Distribution

Possible Outcomes Probability (Reserves Found) 0-10 MMB 0.15 10-20 MMB 0.40 20-30 MMB 0.25 30-40 MMB 0.15 40-50 MMB 0.05

Probabil lity Densit ty 0-10

10-20

20-30

30-40 40-50

After Capen, Rose & Clapp

Prospect Cumulative Probability Distribution

Reserves Found Probability Reserves Found Cummulative (MMB) (MMB) Probability 0 0 0-10 0. 5 0.15 10 0 0. 5 0.15 10-20 0.40 20 0.55 20-30 0.25 30 0.80 30-40 0.15 40 0.95 40-50 0.05 50 1.00

1.0

10

20

30

40

50

After Capen, Rose & Clapp

Statistics dont lie, but statisticians do..

Source: unknown

Expected Value or Mean

The Expected Value (or Mean) of a distribution is th i the weighted average of all possible outcomes, i ht d f ll ibl t each weighted by its probability:
Outcome 1 2 3 4 5 6 x x x x x x Probability Product 0.167 0.167 0.167 0.334 0.167 0.501 0.167 0.668 0.167 0.835 0.167 1.002 3.5

The mean represents the long-run average resulting from repeated trials.
After Capen, Rose & Clapp

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Statistical Parameters :
Mean = y / n (average)

Variance = 2 = ( y - ) 2

(n 1)

Units are distance squared!

Standard Deviation= 2 = =

n(y-) -1

Could sum up all of the distances to see how we did. But some distances are positive and some are negative. Instead we sum the square of the distances. This is called the variance. 2 = (yi - ) 2 n

How good is this guess?

Distance from mean = yi -

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Other Statistical Parameters : Mode if a probability distribution p y is randomly sampled one time, the value with the most likely probability of being sampled is known as th mode. k the d

Suppose we had a very special die that had instead of the normal 1-6 dots on the six sides, it had 2 sides with 2 dots, and 3-6 dots on the remaining four sides sides.

The mean value that could be expected from rolling the die a large number of times is 3.667. But if the die is rolled only once, the most likely outcome is to role the mode, or 2.

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Other Statistical Parameters :

Median the value that corresponds to a cumulative probability of 50%, also referred to as the P50. There is an equal likelihood of and individual sample being either above or below the median.

Probability Distributions
Many different theoretical distributions Normal-familiar bell-shaped curve Lognormal - Logarithm of variable follows Normal distribution
After Capen, Rose & Clapp

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Graphical Representation of Roll of a Die Probability Distribution

1/6

Probability

6
After Capen, Rose & Clapp

Some Types of Probability Distributions

Uniform

Normal

Triangular

Lognormal

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The Normal Distribution

Mathematical equation known as the probability density. f N (x) =

- ( x - )2 / 2

(mean) = 0 2 (variance) = 1

(variance) = 4
2

Note: mean = mode = median !

What Does Cumulative Probability Look Like For the Normal Distribution?

(mean) = 0

2 (variance) = 1

2 (variance) = 4 ( )

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The Lognormal Distribution

Mathematical equation known as the probability density. f ln (y) =

- ( ln y - ) 2 / 2

y2

The Lognormal Distribution

P90

P50 = median

Can estimate the mean using the approximation Swansons Rule 0. 3 (10% point) + 0. 4 (50% point) + 0 3 (90% point) 0. (0. 3 28) + ( 0. 4 100) + (0. 3 355) = 106.5

P10

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P10

mode = 38

P50 = median

mean

P90

Graphing Cumulative Probability

Special graph paper is available for normal and lognormal probability distributions that yields a straight line

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Statistically, this duck is dead!

But that doesnt put meat on the table.

Why Bother with Lognormal?

Variables which are the product of several variables... Reserves = A S ti thickness N t to R Area Section thi k Net t Gross Ratio Porosity Oil Saturation Percent Recoverable tend to follow the Lognormal.

Normal

Normal

=
Lognormal
After Capen, Rose & Clapp

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Many Things in Nature Follow a Lognormal Distribution

Central Limit Theorem

Sum of any independent random variables = Normal Distribution

1,000 Samples

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Central Limit Theorem (continued)

Sum of any independent random variables = Normal Distribution Product of any independent random variables = Lognormal

1,000 Samples

Plotting Data on Lognormal Graph Paper

When number of data points is small, plot each point instead of grouping. Sort data in ascending order and number from 1 to n. For each point calculate the cumulative probability. Probability = Point number / (n + 1) Can estimate the mean using the approximation Swansons Rule
0. 3 (10% point) + 0. 4 (50% point) + 0. 3 (90% point)
After Capen, Rose & Clapp

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Monte Carlo Simulation

A method of determining the probability distribution of an event. The e ent is a f nction of variables that can themsel es event function ariables themselves be expressed as individual probability distributions. Each probability distribution is sampled randomly to calculate a value of the event. The random sampling and the calculation of the value of the event is repeated many times Each calculation is times. know as a pass. The numerous passes define the probability distribution of the event.

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Monte Carlo Simulation

Example:
Prospect Reserves = Area Net Thickness Recovery Factor Acres Area 1 Random R d Guess 0 0 0 1 Feet Net Thickness 1 STBO/Acre-ft

Recovery Factor

Repeat the calculation many times!

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Monte Carlo Simulation Beans problem

What parameters might we use to compute a better estimate of the number of beans in the jar?
Jar volume Jar height; jar diameter Bean volume Bean shape approximately an ellipsoid so
Length g

of long axis (length of bean); g ( g ) Length of width axis (diameter or radius of bean); Length of height axis (assume the same as the width axis) Void space amount

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Monte Carlo Simulation Bean problem Jar volume: 2

d VJar = h 2

Ellipsoid volume

VBean

4 4 l d = abc = b 3 3 2 2

Monte Carlo Simulation Beans problem Number f beans: N b of b

(1 )VJar = Bean Volume = nVBean n=

(1 )VJar
VBean

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Monte Carlo Simulation Using Excel

First Some Useful Excel Functions
Dr. R. G. Hughes

LOUISIANA STATE UNIVERSITY

A N D A G R I C U L T U R A L A N D M E C H A N I C A L C O L L E G E

Craft and Hawkins Department of Petroleum Engineering

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A Closer Look At the Triangular Probability Distribution

a A1 = ( b - a ) h / 2

b A2 = ( c - b ) h / 2

Remember, A1 + A2 = 1

h=2/(c-a)

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A Closer Look At the Triangular Probability Distribution (cont.)

A 1 = ( b - a ) h / 2, also equals the probability at the mode! Pmode = ( b - a ) / ( c - a )

Substituting h yields

What is the cumulative probability of the occurrence a value x between a and c?

h h a x b c

If x < b P x = ( x - a ) h / 2 b, From similar triangles we know: Px = ( x - a )2 (c-a)(b-a) h x-a = h b-a

x = a + Px ( c - a ) ( b - a )

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What is the cumulative probability of the occurrence a value x between a and c?

h h a b x c

If x > b P x = 1 - ( c - x ) h / 2 b, From similar triangles we know: Px = 1 ( c - x )2 (c-a)(c-b) h c-x = h c-b

x = c - ( 1 - Px ) ( c - a ) ( c - b )

Example Triangular Probability Distribution

0.14 0.12 0.10 0.08 0.06 0.04 0.02 0.00 10 15 20 Porosity 25 30

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Example Triangular Cumulative Probability Distribution

( c - x )2 (c-a)(c-b)

Px = 1 -

Px =

( x - a )2 (c-a)(b-a)

Function in Spreadsheet Example Analysis.XLS p y

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Using Excel for Monte Carlo Simulation

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1000

100

Area Thickness

Recovery Factor

10

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Graphical Monte Carlo Simulation

Can be used to combine lognormal probability distributions distributions. When combining two variables, multiplying two P 90% gives P 92.7%, multiplying two P 10% gives P 7. 3% When combining three variables, multiplying three P 90% gives P 98 7%, multiplying two P 10% gives P 1 3% 98.7% 1.

1000 Prospect mean (Swansons Rule) = 0.32.25 + 0.46.06 + 0.316 = 7.9 MMSTBO

100,000,000

98.7

P90 = 16,000,000

100

10,000,000

1.3 10

P10 = 2,250,000 1,000,000

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Discovery Probability
Usually involves estimating probability of several factors that must exist for a commercial HC accumulation to be present: Example: Reservoir quality rock Structure HC Source Reservoir seal Discovery probability is the product of each of the individual factor probabilities (multiplication rule): P discovery = P rock P structure P source P seal

Prospect Economics
Dry Hole Probability = 1 - Pdiscovery

Drill Well

Discovery

Probability = Pdiscovery

Value of Prospect = Pdiscovery (Value of mean reserves less completed well cost) less ( 1 - Pdiscovery ) Dry hole cost

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Proved Reserves
Reasonable certainty

90% probability that amount recovered will equal or exceed the estimated value Economic conditions Operating conditions Government regulations

Economic under existing conditions

Supported by actual tests or production Fluid contacts are base upon the lowest known unless engineering data indicates otherwise Conforms to existing well spacing and regulations Improved recovery only considered if
successful pilot response to an installed program proven in the same or an analogous reservoir

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