SPE-169416-MS

Dynamic Model of Risk Assessment for Mature Fields

R.J. Cervantes Bravo and V.A. Huerta, Universidad Nacional De Ingeniera/ Petroperu

Copyright 2014, Society of Petroleum Engineers

This paper was prepared for presentation at the SPE Latin American and Caribbean Petroleum Engineering Conference held in Maracaibo, Venezuela, 21–23 May
2014.

This paper was selected for presentation by an SPE program committee following review of information contained in an abstract submitted by the author(s). Contents
of the paper have not been reviewed by the Society of Petroleum Engineers and are subject to correction by the author(s). The material does not necessarily reflect
any position of the Society of Petroleum Engineers, its officers, or members. Electronic reproduction, distribution, or storage of any part of this paper without the written
consent of the Society of Petroleum Engineers is prohibited. Permission to reproduce in print is restricted to an abstract of not more than 300 words; illustrations may
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Abstract
Risk assessment is one of the crucial tasks to accurately account for estimating and booking technical
recoverable volumes, as well as, valuating a petroleum asset. Usually these processes are affected by
project maturity or non-technical issues, and usually embrace uncertainty due to lack of information and
different criteria adopted by company and/or evaluators.
It is believed that deterministic cash flow methods are suitable and accurate to assess a project portfolio
in mature oilfields. However, even in the very well known fields with strict surveillance plans, there is still
uncertainty associated to volumes of recoverable hydrocarbons, oil & gas prices, capital investment
estimations, government-take share among others input variables of economic models.
It is proposed a new approach for mature fields which includes a probabilistic model of reserves
estimation (either applied for volumetric calculations or performance-data-based dynamic methods), an
scenario matrix to account for the risk expressed in expectation curves, an estimation of the “pseudo-
limiting” risk and value terms, and a decision tree to define a hierarchy of portfolio. Furthermore, it is
proposed a methodology of life-cycle assessment and surveillance of reserves estimation by integrating of
the “pseudo-limiting” risk and the ratio expected value to capital investment.
The application of this methodology in a mature oilfield, the Peruvian Block IX, show that proposed
infill drilling campaign would require a better royalty share for the company (40% additional to the current
rate), while the implementation of a pilot Water flooding project would need an improve by 50% in
current royalty share.

INTRODUCTION
In the last decade, has been presenting scenarios with high degree of variability due to fluctuations in input
parameters (oil price, oil volume, investment and operating costs), mainly caused by the social and
political circumstances, these being responsible for changes in indicators (NPV, IRR, Pay Out and Return
on Investment) through economic horizon of projects.
These economic indicators are very important tools for the appraiser in their decision making, unlike
other industries, the oil Industry is subject to uncertainties that define the border of viability of projects,
giving rise to success and failure scenarios which should be studied most effectively with a comprehensive
study of the spectrum of risks, for not to give erroneous interpretations that can be completely detrimental
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to the Oil Companies from the economic and institutional aspect, resulting in uncertainties in assets and,
therefore, on the market.
The conventional deterministic approach, governed by the rules of the “System Management Resources
Petroleum” (PRMS-SPE/WPC/AAPG/SPEE) and under the commission framework of stock market is
really restrictive to assess the 1P reserves of a mature field as well as the 2P and 3P that are closely related
to the current geological interpretation, denoting a static panorama for evaluation by the SPE as to the
definition of reserves (Proved, Probable and Possible). From this static point of view; redefining of
reserves are excluded at the time of development of a mature field, being one of the input parameters
which is not subjected to a study of sensitivity and variability.
Below, we present the input parameters with their respective degrees of deviation proposed by external
and internal agents during execution, and followed by occurrence indicators in a previous study of
Descriptive Statistics in projects implemented and / or trends in the market for its degree of variability.
Thus, known our economic indicators as a result of the input base parameters it is very important make
a Sensitivity Analysis in order to quantify the influence degree in the projects viability during its
execution, of this way we can generate the matrix of scenarios, generating a success distribution in respect
of Base Reserves (2P- Static Success), and how extremes of the distribution (1P and 3P – Dynamic
Success) and their probabilistic deviations in another parameters according their statistics.
The matrix of scenarios represent the different events, possible inside the execution of the Project,
considering the interactions with profit results, loss and their statistic probabilities, in this way we can see a
profit central tendency. These events are discrete that is why we will realize an interval dimensioning, in order
to have a continuous distribution, cumulative and representative of the sample; this will generate a cumulative
distribution of investment risks through a dynamic uncertainty model with its variability degree.
Done the simulation with the defined risk model and analyzing the specific weight of each one of the
variable risk, we will get our values of NPV, net profit of the investment project, and the Cash Flow percentiles
respect of their success probabilities. This central tendency to the 50% percentile shows real profit of
investment according the proposed methodology, and not as a result of using the static NPV, which is not
representative of the behavior of the oil projects. It is important to say that the success of the proposed
methodology depends mainly of the maturity during the execution of future projects in different fields,
describing the different uncertainties of the fields with a systematic analysis of the portfolio assessment.
In this paper we present as a study cases: one exploration Project and one explotation Project, which
have their own considerations according the nature of each project. For its prioritization has been
considered a new probabilistic dynamic approach that give us consistency and confidence in the
estimations 1P, 2P and 3P, and incorporate the concept of “pseudo-limiting” risk generated by the use of
strong concepts of descriptive statistic during the economic and technical analysis in the probabilistic
modeling, this give us more real values about the monetizing of our reserves, all these according the
definitions of Society of Petroleum Engineers (SPE) y the Security and Exchange Commission (SEC).
This dynamic methodology is going to help us to redefine or booking our reserves in function of a risk
analysis and investment performance. Showing us an important reduction of the uncertainty mainly generated
because of the absent of information of the real scenarios, having as an alternative solution the use of variables
which can be observed in real time and overlay in the viability horizont. Because these parameters have a strong
incidence in the projects, we can make a suitable decision making of our investment, and obtain a major
confidence degree through the “pseudo-limiting” risk; and a better confidence in our futures assets portfolio.
It is important to say that with this methodology we can detect inconsistencies among the probabilistic and
deterministic computations, whichever the method used in the estimation and definition of reserves.
Finally, using the decision tree we can obtain our expected value from the projects portfolio in the
diferent risk and deviation scenarios, reducing the proposed scenarios in each case according the Scenarios
Analysis, this conduce to a reduction of risk during the execution of the projects.
The Figure 1 and 2 show the methodology of the dynamic model and a reserves summary.
SPE-169416-MS 3

Figure 1—Schematic of dynamic model methodology.

STUDY CASE 1
The geological surface information and information of drilled wells have enabled to stablish the
stratigraphic control, structural, fluid distribution and the quality of reservoirs; these give an average
acceptable risk factor to the exploratory location 3EX, especially taking into account that the project has
two objectives for evaluation, with interesting reserves potential.
The average risk factors assumed in the location proposed are:

Stratigraphic : 10%
Structural : 30%
Fluids : 20%
Total average : 50%

I. Reserves estimation and production forecast

The final recovery estimated of reserves more probable (EUR) for the objective reservoir in the
exploratory location 3EX is the following:

San Cristóbal : 14.2 MSTB

Upper Mogollón : 43.2 MSTB
Lower Pariñas : 32.3 MSTB
Total : 111.8MSTB

See Figure 3. Production forecast of the location 3EX.

4 SPE-169416-MS

Figure 3—Forecast production of 3EX

Figure 2—Reserves summary.

II. Economic evaluation

The calculations for the evaluation have been performed considering a Norwest average basket of US$
101.143 / Bbl and retribution of US$ 36.80 / Bbl.
a. Required investment
The require investment to carry out the drilling Project of 3EX totals MUS$ 605.80.
b. Parameters considered
The economic evaluation has been performed based on estimated reserves, production forecast and the
following economic parameters:
Investment:

Tangible: MUS$ 145.39

Intangible: MUS$ 460.41
Payment: 36.80 US$ / Bbl

Depreciation:
Tangibles: Lineal in function of productivity.
Intangibles: The first year
Operating expenses: US$ 15.00/Bbl.
Tax rate: 18%
Discount rate: 15%
Figure 4. Show the investment table for exploratory drilling location 3EX.
Similarly Figures 5, 6 y 7, shows graphs that explain the results of the economic evaluation conducted
to the exploratory project 3EX.
SPE-169416-MS 5

Figura 4 —CAPEX 3EX project

c. Results
Total investment: 605.80 MUS$
NPV (15%):642.02 MUS$
IRR: 112%
Pay Out: 1 year and 9 months
Return on investment:105.98 %
III. Sensitivity analysis
Economic sensitivity was performed to the project 3EX; the results are shown in Table 1.
Figure 8 Show the economic sensitivity of the project 3EX through the most influential parameters on
the viability of the project.
IV. Scenario analysis
A matrix scenario was defined shown in Table 2. This table shows each of the parameters with their
respective probabilities of occurrence.
Using Table 2, we can make the simulation to build the event tree (The event tree is not shown here),
where we can have as a result the different cash flows and thus have a random distribution of occurrences
with its 81 events as shown inFigure 9.
V. Risk analysis
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Figure 5—Economic assessment - 3EX location

Figure 6 —VAN or NPV – Period (3EX)

After obtaining our random values, we will limit per intervals the cases for a better accumulative
distribution of probabilities and this way to identify and quantify probabilistic risk values and success.
This evaluation is shown in Figure 10.
Results
Probability of investment risk: 12.77 %
SPE-169416-MS 7

Figura 7—VAN or NPV – IRR (3EX)

Table 1—Economic sensitivity of the 3EX location

Probability of investment success: 87.23 %

Base value: 1681.36 MUS$
Expected value: 2262.79 MUS$
Standard deviation: 2015.36 (MUS$)2
VI. Analysis of probability gain
Here we identify our best probabilistic characteristics intervals as shown in the Figure 11, we noticed
that in the interval [1200, 1800] we identify our base values, so it is consistent with the expected values.
Once the simulation model defined and analyzed the specific risk weight with each of the risk variables
in the final value of NPV and investment project net profit, those risks that have the greatest influence on
the outcome of our project are identified, and which should be given special attention. Regarding these
risk variables considered most significant results obtained may define different scenarios to deal with:
optimistic and pessimistic expectations about the behavior of the variable.
8 SPE-169416-MS

Figure 8 —Impact of variables in the economic sensitivity

Table 2—Matrix of scenarios

Finally, we show how the trend of cumulative probability behaves (Figure 12) regarding the effective
gain, where the axis intersects (0, Y) to graphically display the probability of investment risk is 12.77%.
Giving us a very optimistic scenario in terms of decision making.
RESULTS:
Percentil@10%: - 230.38 MUS$
Percentil@50%: 1772.76 MUS$
Percentil@90%: 4884.44 MUS$
We conclude that our investment Project is viable and irrigated given by the following parameters
analyzed:
NPV⬎ 0
IRR⬎ discount rate
PAYOUT ⫽ 1 year and 9 months
Return of investment ⫽ 105.98 %
Probability of success ⫽ 87.23 %
Probability of risk ⫽ 12.77 %
CASE STUDY 2
The geological surface information and information of drilled wells have enabled to stablish the
stratigraphic control, structural, fluid distribution and the quality of reservoirs; these give an average
acceptable risk factor to the development location 1PX.
SPE-169416-MS 9

Figure 9 —Random distribution of occurrences

Figure 10 —Interval boundedness

The average risk factors assumed in the location proposed are:

Stratigraphic : 10%
Structural : 20%
Fluids : 10%
Total average : 35%

I. Reserves estimation and production forecast

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Figure 11—Probability of scenarios

Figure 12—Cumulative trend of probability, regard to the effective gain

The final recovery estimated of reserves more probable (EUR) for the objective reservoir in the
development location 1PX is the following:

Total : 41.6MSTB

The estimated average initial production for the first month is 21.3 Bpd.
See Figure 13. Production forecast of the location 1PX.
II. Economic evaluation
SPE-169416-MS 11

The calculations for the evaluation have been performed considering a Norwest average basket of US$
101.143 / Bbl and retribution of US$ 36.80 / Bbl.
a. Required investment
The require investment to carry out the drilling Project of 1PX totals MUS$ 386.10.
b. Parameters considered
The economic evaluation has been performed based on estimated reserves, production forecast and the
following economic parameters:
Investment

Tangible: MUS$ 88.80

Intangible: MUS$ 297.30
Payment: US$ 36.80 / Bbl

Depreciation

Tangibles: Lineal in function of productivity.

Intangibles: First year
Operating expenses: US$ 15.00/Bbl.
Tax rate: 18%
Discount rate: 15%

Figure 14. Show the investment table for development drilling location 1PX.
Similarly Fig. 15, 16 y 17, show graphs that explain the results of the economic evaluation conducted
to the development project 1PX.
12 SPE-169416-MS

Figure 14 —CAPEX of development location for 1PX.

c. Results:

Total investment : MUS$ 386.10

NPV (15%) : MUS$ 93.80
IRR : 28 %
Pay Out : 5 years and 6 months
Return on investment : 24.29 %

III. Sensitivity analysis

Economic sensitivity was performed to the project 1PX; the results are shown in Table 3.
Figure 18. Show the sensitivity of the economic evaluation of the project 1PX:
IV. Scenario analysis
A matrix scenario was defined shown in Table 4. This table shows each of the parameters with their
respective probabilities of occurrence.
Using Table 4, we can make the simulation to build the event tree (The event tree is not shown here),
where we can have as a result the different cash flows and thus have a random distribution of occurrences
with its 81 events as shown in Figure 19.
SPE-169416-MS 13

Figure 15—Economic assessment for 1PX location

Figure 16 —VAN or NPV – Period (1PX)

V. Risk analysis
After obtaining our random values, we will limit per intervals the cases for a better accumulative
distribution of probabilities and this way to identify and quantify probabilistic risk values and success.
This evaluation is shown in Figure 20.
14 SPE-169416-MS

Figure 17—VAN or NPV – Discount rate (1PX)

Table 3—Sensitivity of project of the 1PX location

Results:

Probability of investment risk: 15.08 %

Probability of investment success: 84.92 %
Base value: 427.04 MUS$
Expected value: 961.61 MUS$
Standard deviation: 1263.14 (MUS$)2

VI. Analysis of probability gain

Here we identify our best probabilistic characteristics intervals as shown in the Figure 21; we noticed
that in the interval[0, 600], we identify our base values, so it is consistent with the expected values.
Once the simulation model defined and analyzed the specific risk weight with each of the risk variables
in the final value of NPV and investment project net profit, those risks that have the greatest influence on
SPE-169416-MS 15

Figure 18 —Sensitivity of project of the 1PX location

Table 4 —Matrix of scenarios

the outcome of our project are identified, and which should be given special attention. Regarding these
risk variables considered most significant results obtained may define different scenarios to deal with:
optimistic and pessimistic expectations about the behavior of the variable.
Finally, we show how the trend of cumulative probability behaves (Figure 22) regarding the effective
gain, where the axis intersects (0, Y) to graphically display the probability of investment risk is15.08%.
Giving us a very optimistic scenario in terms of decision making
RESULTS:
Percentil@10%: - 250.72 MUS$
Percentil@50%: 478.21 MUS$
Percentil@90%: 2991.87 MUS$
We conclude that our investment Project is viable and irrigated given by the following parameters
analyzed:
NPV⬎ 0
IRR⬎discount rate
PAYOUT ⫽ 5 years and 6 months
Return of investment ⫽ 20.49 %
Probability of success ⫽ 84.92 %
16 SPE-169416-MS

Figure 19 —Random distribution of occurrence

Figure 20 —Interval boundedness

Probability of risk ⫽ 15.08 %

PRIORIZATION AND PORTFOLIO DECISION MAKING DURING THE

ECONOMIC HORIZONT
Inside the execution stage of drilling projects is very important to make a priorization of projects execution
according to the technical and economical evaluation (economic parameters) as assessments axes of our
projects, in this way we can obtain an optimum behavior of the investment in function of the risk applied
to the proposed model.
a. “Pseudo-limiting” Risk and Reserves Redefinition.
SPE-169416-MS 17

Figure 21—Scenarios Probabilities

Figure 22—Cumulative trend respect to the effective profit.

Table 5 show the absolute success probabilities typical in exploratory and development (technical)
risks in an economic risk environment obtained through the profit probabilities of each drilling project.
Table 6 shows the priority in the execution stage.
Obtained the absolute success probabilities of each drilling project, we can get an order of execution of the
projects in order to build the DECISION TREE (Figure 25: Iterations for the events tree from decision
making of the drilling project), of this way we have the drilling execution scenarios, also the right decisions
in the diferent success or not success cases, in order to minimize the losses during the investment.
Considering the above concepts, exists the possibility of redefine or booked our reserves as a function
of Risk Analysis and Scenarios, these analysis showed a reduction of the uncertainty generated mainly
because the absent of information of the real scenarios, having as an alternative solution the use of
18 SPE-169416-MS

Table 5—Absolut succes or not succes probability.

Table 6 —Execution Priority.

Figure 23—Reserves redefinition along time.

variables which can be observed in real time and overlay in the viability horizont. Because these
parameters have a strong incidence in the projects, we can make a suitable decision making of our
investment, and obtain a major confidence degree through the “pseudo-limiting” risk.
SPE-169416-MS 19

Figure 24 —Decision tree.

Figure 25—Behavior along the Project execution.

It is important to consider what the projects and the definitions from SPE, try to delimit the reserves
concepts (proved, probable and possible) from a static point of view regarding the economical evaluation
and considering commercial reserves to a specific time, excluding probable reserves which in the future
could be proved. This mean that our proved reserves could became probable or possible, due the
investment risk and the parameters variability which affect this concept (Oil Price, Investment and Costs).
b. Cash Flow Portfolio Analysis
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Tabla 7—Expected values in diferents scenarios.

Finally, using the decision tree we can obtain our expected value from the projects portfolio in the
diferent risk and deviation scenarios how is showed in Figure 25 and Table 7.
RESULTS, CONCLUSIONS AND RECOMMENDATIONS
✓ Expectation curves of technical recoverable volumes under a cumulative approach are the most
suitable input towards estimating “Pseudo limiting” Risk; the higher resolution of discrete scenarios of
main economic model inputs, the better representation of the risked net profit.
✓ The dynamic probabilistic model of economic evaluation may be useful to provide consistency to
reserves categorization management and surveillance by assessing the “Pseudo limiting” Performance Risk;
proved, probable and possible reserves will change dynamically throughout an economic horizon as “risk”
changes.
✓ “Pseudo limiting” Performance Risk incorporates technical y economic issues simultaneously, so it
allows a better representation of risk in Oil & Gas investments.
✓ The “Pseudo limiting” Risk approach allows a more robust surveillance of project investments as
risk is continuously updated with production performance and operational costs; thus, improving
decision-making process of future exploratory and development expenses.
✓ The current approach allows estimating the actual expected profit of a company´s portfolio which is quite
different from the deterministic calculation by the simple aggregation of the individual project´s profits.
✓ The dynamic probabilistic model of economic evaluation is flexible to incorporate new projects for
portfolio analysis, using historical performance to define trends and feasibility; thus, we can redefine
our feasibility limits according to government criteria, oil company”s policies, even under highly
investment risk scenarios.
✓ This approach is also more accurate to run a holistic sensitivity analysis; it can be used to sensitize
operational costs, oil prices, capital investments, as well as, royalties and government-take simulta-
neously, which is very valuable in the context of negotiation of oil assets contracts.
✓ The referred methodology is a very powerful tool in terms of decision-making for execution of
projects; therefore, as it is shown in case studies 1 and 2, the expected gain for the portfolio that
includes exploratory and development projects is as follows:

Total Investment: 3068.70 MUS$.

Theoretical NPV: 1007.52 MUS$.
Real NPV: 263.99 MUS$
SPE-169416-MS 21

ACKNOWLEDGEMENTS
At first, to my family for all the support and love, my best efforts are always for you.
To the National University of Engineering, my house for five years.
Special thanks for the Company UNIPETRO ABC, their workers and its General Manager Ing. José
Vitonera Infante.
To Alex Huerta, co-author and friend.
To Rony Layme for his help in the design and layout of the document.

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22 SPE-169416-MS

Diagram 1—Risk Distribution.

SPE-169416-MS 23

Diagram 2—Iterations Tree for 3PX Location.

24 SPE-169416-MS

Diagram 3—Risk Distribution.

SPE-169416-MS 25

Diagram 4 —Iterations Tree for 1PX Location.