The risk matrix (RM) is a widely espoused approach to assess and analyze risks in the oil & gas (O&G) industry. RMs have been implemented throughout that industry and are extensively used in risk-management contexts. This is evidenced by numerous SPE papers documenting RMs as the primary risk management tool. Yet, despite this extensive use, the key question remains to be addressed: Does the use of RMs guide us to make optimal (or even better) risk-management decisions? We have reviewed 30 SPE papers as well as several risk-management standards that illustrate and discuss the use of RMs in a variety of risk-management contexts, including HSE, financial, and inspection. These papers promote the use of RMs as a "best practice." Unfortunately, they do not discuss alternative methods or the pros and cons of using RMs. The perceived benefit of the RM is its intuitive appeal and simplicity. RMs are supposedly easy to construct, easy to explain, and easy to score. They even might appear authoritative and intellectually rigorous. Yet, the development of RMs has taken place completely isolated from academic research in decision making and risk management. This paper discusses and illustrates how RMs produce arbitrary decisions and risk-management actions. These problems cannot be overcome because they are inherent in the structure of RMs. In their place, we recommend that O&G professionals rely on risk- and decision-analytic methods that rest on over 300 years of scientific thought and testing.

Summary The oil and gas industry uses production forecasts to make decisions, which can be as mundane as whether to change the choke setting on a well, or as significant as whether to develop a field. These forecasts yield cash flow predictions and value-and-decision metrics such as net present value and internal rate of return. In this paper, probabilistic production forecasts made at the time of the development final investment decisions (FIDs) are compared with actual production after FIDs, to assess whether the forecasts are optimistic, overconfident, neither, or both. Although biases in time-and-cost estimates in the exploration and production (E&P) industry are well documented, probabilistic production forecasts have yet to be the focus of a comprehensive, public study. The main obstacle is that production forecasts for E&P development projects are not publicly available, even though they have long been collected by the Norwegian Petroleum Directorate (NPD), a Norwegian government agency. The NPD's guidelines specify that at the time of FID, the operators should report the forecasted annual mean and P10/90 percentiles for the projected life of the field. We arranged to access the NPD database in order to statistically compare annual production forecasts given at the time of FID for 56 fields in the 1995 to 2017 period, with actual annual production from the same fields. This work constitutes the first public study of the quality of probabilistic production forecasts. The main conclusions are that production forecasts that are being used at the FID for E&P development projects are both optimistic and overconfident, leading to poor decisions.1 1 The conclusions based on the analysis presented in this paper are limited to the set of fields from the NCS. However, other authors have demonstrated the optimism bias in production forecasts from fields around the world (Nandurdikar and Wallace 2011; Nandurdikar and Kirkham 2012).

The oil & gas industry uses production forecasts to make a number of decisions as mundane as whether to change the choke setting on a well, or as significant as whether to develop a field. As these forecasts are being used to develop cashflow predictions and value and decision metrics such as Net Present Value and Internal Rate of Return, their quality is essential for making good decision. Thus, forecasting skills are important for value creation and we should keep track of whether production forecasts are accurate and free from bias. In this paper we compare probabilistic production forecasts at the time of the development FID with the actual annual production to assess whether the forecasts are biased; i.e., either optimistic, overconfident, or both. While biases in time and cost estimates in the exploration & production industry are well documented, probabilistic production forecasts have yet to be the focus of a major study. The main reason for this is that production forecasts for exploration & production development projects are not publicly available. Without access to such estimates, the quality of the forecasts cannot be evaluated. Drawing on the Norwegian Petroleum Directorates (NPD) extensive database, annual production forecasts, given at time of project sanction (FID), for 56 fields in the 1995 – 2017 period, have been compared with actual annual production from the same fields. The NPD guidelines specify that the operators should report the annual mean and P10/90-percentiles for the projected life of the field at the time of the FID; that is, the forecasts should be probabilistic. The actual annual production from the fields was statistically compared with the forecast to investigate if the forecasts were biased and to assess the financial impact of such biases. This paper presents the results from the first public study of the quality of probabilistic production forecasts. The main conclusions are that production forecasts that are being used at the FID for E&P development projects are both optimistic and overconfident. As production forecasts form the basis for the main investment decision in the life of a field, biased forecasts will lead to poor decisions and to loss of value.