Use of Probability Management in E&P Portfolio Analysis

Abstract

Capital investment decisions are a critical decision that every organization must take in a careful manner to optimize its resources. In the industry driven by uncertainty such as upstream petroleum industry, it becomes vital to consider uncertainties in a proper way while making capital investment decisions. Even if one consider cyclical nature of petroleum industry, the historical financial performance of the industry as a whole has been discouraging. One of the key reason behind this can be attributed to use of average or single value in spreadsheet models used for economic evaluation of a project. Interpretation of Modern Portfolio Theory has long been established as a valuable tool while evaluating investment opportunities in the context of petroleum projects-portfolio. We use a field of information management called Probability Management to build a project level and portfolio level model. Probability management, which uses an array of pre-generated random trials as an uncertain variable, provides a standardized way to communicate and model uncertainties across the organization without the need for any special program. The model developed in this work used two kinds of price model to demonstrate an importance of including inter-asset dependencies in the form of stochastic oil and gas price model to show the usefulness of approach developed in this study compare to current practice. The interactive model, developed in this study, is easily customizable and shareable to a broad audience. This study provides a portfolio and project level model with multiple attributes that decision maker can use for making capital investment decisions. We welcome further research for the use of Probability Management in another area of the petroleum industry.