Technical Analysis & Business Analysis Tips | Risk Analysis

By: Stig Kristoffersen

The ability to do efficient exploration in a high diversity of play types and settings and risk scenarios makes a successful exploration strategy. Doing exploration in a low risk setting does not represent the high challenge for the geoscientists nor the economists in an oil and gas company. But exploring in a high risk environment with uncertain or new play models puts the company in another setting.
The term high risk and high reward exploration is a term only few companies are willing to take both in short and long run. However the companies are forced into these scenarios more and more as the more obvious plays are played out already. However, having said this, one should also be concerned about not being able to think outside the box in existing low risk play areas. In this case we talk about "brown" field exploitation strategies. These are higher risk than existing discoveries had, however could have a tremendous economic potential due to its proximity to existing infrastructure and development situation. Most companies currently avoid ventures associated with high risk and high reward settings. The thesis stating that the major fields are found first in a basin is not always true.
High risk and high reward projects find little competition as there are still so few companies pursuing these scenarios projects.
Larger international or even some of the major national companies tend to not avoid high risk and high reward ventures; instead, they make special efforts to ensure that such ventures are being properly analyzed and risked together with the rest of their asset portfolio.
There are some technical and business analysis aspects that deserve closer attention when considering high risk and high reward projects;
&bullgeologic risk assessment,
&bullproper reward estimation,
&bullrecognition of the large number of trials to establish success,
&bullincreased challenge in doing wildcat evaluation,
&bulla frequent lack of understanding for a proven petroleum system, and
&bullthe inadequacy to provide adequate rewards for any high risk venture.

Geologic Risk Assessment
Low risk ventures are commonly over-risked as the high risk projects are often under-risked. By this I mean that we tend to risk according to our certainty of the individual risk parameters for reservoir, trap, and source elements. As this understanding decrease we tend to make more assumptions into our risk assessments instead of analytical understanding of them.

We have improved our risk assessments methodologies in all classes, but high risk ventures are intrinsically difficult to accurately assess. We should therefore expect high risk ventures to have substantial uncertainties in their probability estimations.

Properly reward the risk estimation effort
Most companies have evolved methodologies to systematically assess risk, however fewer companies check project reward against history and field size probabilities.
Post Mortem reports could be the way to go to give proper reward systems for management in a company to measure their exploration efforts ability to risk their projects. The Post mortem report is continuously updated with the cumulative plot of risked expectation volumes compared to the actual discovered volumes. This post mortem is entered on a wildcat by wildcat basis. Updating and displaying the Post mortem report allows management to keep the confidence in the conduct of their exploration program.

High Risk projects needs more trials to succeed
Confidence in risk estimation is especially difficult for high risk ventures, since a great number of failures must be observed before success can be acheived.
Probabilities of success only reflect real outcomes when large numbers of trials are undertaken. And the meaning of "large numbers of trials" is defined by the probabilities (Ps).
Remember, if the Ps of a venture is .5 (a coin flip); it will take five trials before you may be certain (95% certain) of at least one success. For a high risk venture of, say, Ps .1, you would need to endure about 25 trials to be certain of at least one success.
Does your company have the confidence, capital, and persistence to pursue high risk ventures?

How to recognize Success in High Risk Provinces
In areas of historical production, with well-known reservoirs and petrophysical characteristics, success or failure can confidently be determined with a single wildcat. In high risk provinces, it is generally more difficult to obtain a reliable determination of the productive capability of a wildcat. Indeed, work by Bob Sneider pointed out that in the past twenty years, a typical 500 MMBOE accumulation would have been drilled by three wildcats, on average, before being recognized as a field.
James D. Robertson in a Search and Discovery Article number 70019 of 2006 describes elements he regard as important business elements for being successful in high risk and high reward plays.
? Study charge first to refine search.
? View geochemistry as a critical exploration tool equal to geology and geophysics.
? Drill with alternate outcomes as protection.
? Analyze downhole pressures extensively.
? Rely on exploration knowledge to overcome land problems.
? Deploy expert exploration teams that can link correct insights together.
? Appreciate that the big fields are not always found first.
These factors were required to transform a wildcat in a high risk province in Indonesia into a world class high reward discovery. A number of wildcats had already penetrated the accumulation and would have been scored as non-commercial failures, until improved analyses by the Arco team determined that a 20 TCF field could be recognized.
Contractual Difficulties to Large Rewards
Many, perhaps most authority contracts are biased to prevent the large returns that high risk project economics demand. Even in countries where the terms allow very high returns for very high risks, it is most likely that these terms will be unilaterally altered, given a success story.

Petroleum Systems in High Risk Settings
The most common technical challgenge for high risk exploration ventures is the lack of a petroleum system. Lack of understanding as well as wishful thinking and improper evaluation of hydrocarbon shows may delude explorationist as to the true risk.
A working petroleum petroleum system is demonstrated by production of hydrocarbons to a borehole.
A working petroleum system is NOT demonstrated by surface seeps, by hydrocarbon shows from mudlogs, by trip gas, by hydrocarbon stains on cuttings or cores, or by surface geochemical anomalies. Such hydrocarbon shows can be important clues, but they do not prove the presence of a petroleum system.

Thehigh risk/high reward ventures are different, in a non-linear way, from lower risk/modest reward ventures and thus require far more knowledgeable technical examination and business review for success.
Select the high risk ventures where early, low cost technical work might provide an option to dramatically improve the probability of success.


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