Summary
This study examines the loss in project value incurred when concept
selection decisions are based on erroneous estimates of input variables.
Estimates of the magnitude of such losses are provided, along with an analysis
of which input variable estimates matter most in determining value loss. A
procedure for concept selection is defined to model the decision making process
and is used in conjunction with a simplified asset development optimization
model to estimate project values. The analysis compares project values
resulting from concept selection decisions based on erroneous estimates to
values based on an alternate hypothesis. Results suggest that the cost of using
erroneous estimates for initial costs, expansion costs, and the timing of
future expansion projects is comparable in magnitude to the cost of erroneous
reserve estimates. Also, the cost of underestimating expected reserve volume
tends to be larger than the cost of overestimating reserve volume, aggressive
cost estimates are more destructive to value than conservative estimates, and
conservative schedule estimates for the timing of expansion projects are
generally more destructive to value than aggressive schedule estimates.
Introduction
During the concept comparison and selection phase of exploration and
production (E&P) capital projects, decision makers estimate the value of
competing development concepts. These estimates are used to rank options and to
select one option to carry forward to the next project phase. The importance of
these estimates cannot be overstated; they determine which concept is selected,
and have a strong influence on field architecture, initial capacity of
facilities, well counts, production rates, and project schedule. Decisions in
concept selection have a large impact on the value ultimately derived from the
asset (Evans 2005; Walkup and Ligon 2006). These estimates are also used for
other important analyses and decisions during concept selection such as value
of information (VOI) analysis.
A variety of input variables are required to estimate the value of competing
development concepts. These input variables include estimates for the
subsurface (e.g., reserves, flow rates, decline rates), estimates for the
surface facilities (e.g., CAPEX, OPEX, schedule, reliability), and estimates
for exogenous factors such as commodity price. The true values of these input
variables are almost always unknown, and estimates are developed based on the
current information set available to the decision maker.
The objective of this study is to examine and compare the loss in value
incurred when concept selection decisions are based on erroneous estimates of
input variables. Errors can occur in estimates of expected values and in
estimates of variance. The conclusion that erroneous estimates of input
variables can destroy project value is common sense. What this study attempts
to provide are original estimates of the potential magnitude of such losses,
and an analysis of which input variable estimates matter more than
others.
In practice, one does not know if a current estimate for an input variable
is erroneous, but one can estimate the impact of an alternate hypothesis being
true, and this is the framework adopted here. A procedure for concept selection
is defined to model the decision-making process and is used in conjunction with
a simplified asset development optimization model to estimate project values.
The analysis compares project values resulting from concept selection decisions
based on erroneous estimates and decisions based on an alternate hypothesis; in
both cases, the alternate hypothesis is taken to be true. The difference in
value observed, if any, is caused by sub-optimal initial facility capacity
(note that the difference in value can also be interpreted as the maximum
willingness to pay to confirm the alternate hypothesis). The approach is
similar in form to standard VOI analyses (Coopersmith et al. 2006; Bickel et
al. 2006; Prange et al. 2006; Gilbert et al. 2007).
The number of input variables normally required to estimate the value of
competing development concepts is immense, and estimates are required from all
project disciplines. This study examines the loss in value associated with
errors in estimates of three key input variables: reserves, initial facility
cost, and facility expansion cost and schedule. These three variables have a
large impact on project value. The reserves estimate drives most major
development decisions, including the depletion plan, well counts, and facility
design. Facility cost estimates influence concept type, initial facility
capacity, and plans for future expansion. Estimates for the cost and timing of
future facility expansion affect the initial facility capacity decision and the
value that can be captured given upside realizations of subsurface scenarios.
The results of this study provide insight on the magnitude of losses associated
with erroneous estimates for these input variables, and enable a relative
ranking of these inputs based on the impact on project value.
© 2008. Society of Petroleum Engineers
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History
- Original manuscript received:
2 August 2007
- Meeting paper published:
24 September 2006
- Revised manuscript received:
31 October 2007
- Manuscript approved:
2 November 2007
- Version of record:
15 March 2008
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