Technical Aspects of Risking and Valuation of Shale Reservoirs
- Nasrin Hashemi (Statoil ASA) | Oeystein Lie (Statoil ASA) | Alistair Stuart Chandler (Statoil ASA) | Pal B Ingsoy (Statoil ASA)
- Document ID
- Society of Petroleum Engineers
- SPE Unconventional Resources Conference and Exhibition-Asia Pacific, 11-13 November, Brisbane, Australia
- Publication Date
- Document Type
- Conference Paper
- 2013, Society of Petroleum Engineers
- 5.6.4 Drillstem/Well Testing, 1.6 Drilling Operations
- shale, valuation, risking, Decision
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- 198 since 2007
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This paper focuses on valuation of shale based opportunities, arguing that the valuation process should be decision driven and model based, grounded in Bayesian principles. Risk should be controlled in order to maximize value. Using a decision tree to structure the valuation, we demonstrate that a method based on hypothesis testing can be utilized to determine the probabilities associated with chance nodes. It is shown that the probabilities depend on the scope and quality of the appraisal program. The risk level posterior to a chance node is discussed and calculated by Bayesian inversion. It is shown that the model underpinning the valuation must be updated posterior to chance nodes according to Bayes theorem. Failure to do so may lead to underestimating the value of the opportunity. Finally we discuss the use of simple truncation as an approximate method for updating the model after a pilot production phase.
The term unconventional has come to embrace a variety of hydrocarbon resources, including tight reservoirs, hydrocarbon bearing shales, CBM, gas hydrates, bituminous sands, and even more elusive types. The current paper covers only shale based oil and gas resources. Evaluation of unconventional resources leads to a different risk picture than those of conventional assets. Somewhat simplified, risk is shifted from discovery and in-place volumes to development and the capability to deliver commercial rates.
This paper discusses decision driven valuation of unconventional opportunities. In this process, risk is considered as either systematic or unsystematic. Including variables like the oil and gas price, the systematic risk is often captured in the discounting rate that is applied in the value calculations and is not very manifest in the discussion below. At project level, the valuation process presumes that a hypothetical Developer is concerned with maximizing value under the impact of unsystematic risk - that prominently includes the subsurface risk. In a portfolio, the unsystematic risk tends to be diversified as the number of projects increases, a fact that is relevant for the level of de-risking needed in project development.
The valuation sequence
The valuation of an opportunity often follows a sequence that starts with studying the so-called Identification Stage Variables such as Total Organic Carbon (TOC), Vitrinate reflectance, net thickness, depth, pressure, area and gas in place (Halliburton, 2011). Any deviation from established acceptable values should raise the level of concern with regard to subsurface risk.
The next step involves tentatively outlining a business case before proceeding to develop single well production profiles and costs that will allow a first pass discussion of single well economy. We have found it very convenient to represent the single well performance by a response function established by linear regression (Chaudhri, 2012). An important aspect of the single well performance is that it may be correlated with the full field development NPV (Melvyn, 2012).
Given that the single well economy is positive, the valuation may proceed to consolidate a business case and to finalize the decision tree. A "profile generator?? is used to integrate full field production profiles that are attuned to the outcome of chance nodes and decisions. The potential outcomes of exploration and appraisal wells yet to be drilled must be introduced according to Bayes' theorem. Introducing the appropriate cost data then allows calculation of NPV by backwards induction (Pratt, J.W, 1994).
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