Making sound business decisions in one of the hottest domestic exploration plays, unconventional gas, offers a set of challenges not usually encountered with more traditional opportunities. Unlike with standard prospect and conventional play risk analysis, geologic chance is not a major issue, and estimates of initial production, decline rates, mechanical efficiency, and success planning dominate the analysis rather than traditional volumetric determinations. The valuation and assessment of unconventional or "continuous resource" opportunities is not feasible using traditional probabilistic, volumetric-based methods. A fully stochastic business, value-chain model is the best way to assess the potential of an unconventional play. Such an evaluation method allows for multi-disciplinary and cost input that affords decision makers with the appropriate data to make good decisions. The boundaries of unconventional reservoirs extend well beyond the limits of most individual acreage holdings. As such, the recommendations of Schmoker and others to base the full resource availability on a cell or single well drainage area should be embraced as a starting point. Resource uncertainty is handled by a continuum of well size distributions arranged to form an EUR Envelope. Volumes are only part of the equation, however. Uncertainty in the production profile must be taken into account, with variations in initial production, decline rate, and hyperbolic exponent figuring prominently in the final assessment of profitability. There are four main stages in the exploitation of unconventional opportunities: Exploration, Evaluation, Delineation, and Development. Proper assessment, including identification and management of downside risk, requires a decision-focused, integrated, multi-discipline evaluation process through the four stages. Unconventional plays use an initial number of wells to test the viability of a play and stimulation technology/methods. These pilot programs can be optimized, for number of wells, and company risk tolerance. Pilot Effectiveness is the (measurable) probability of the pilot program providing truthful results given the small number of test wells modeled. Output from the proposed stochastic evaluation method include both single economic and product-based metrics in cumulative probability curves, as well as time series output in both aggregate and pathway forms. A thorough understanding of results analysis, Value of Information, and decision options is encouraged in order to take full benefit of the stochastic assessment method. Introduction In recent years, resources recoverable from reservoirs of difficult nature have come to be called "Unconventional Resources". In addition to fractured reservoirs, unconventional plays include tight gas, gas/oil shale, oil sands, and coal-bed methane (CBM).

There is significant current commitment within the industry to develop and implement methods to assess the prospectivity of Unconventional Resource opportunities. The purpose of this paper is to identify some of the common recurring errors in both numerical evaluation and operational priorities, with specific examples. Efficient planning and evaluation of Unconventional opportunities is critical due to the low margin, high capital nature of the business. Converting the Conventional exploration and development mindset over to one that places high value on project management and manufacturing efficiency is difficult. Appropriate evaluation and applied operational learning are critical to evaluating decisions that can mitigate downside risk, including the critical post-pilot go/no go decision. Some Specific trouble points are: Attempting to model future program results with a single distribution of individual well EUR results-predicting the unpredictable with unwarranted precision. Force fitting a lognormal distribution through datasets that are decidedly non-lognormal, particularly in the outer portions of the probability space. The ‘double whammy’ of prediciting an overpopulation of high volume wells (including unrealistically high recovery wells) and underpopulation of low volume wells results in overestimation of results… often significantly so. Overemphasizing assessment of chance of geologic success, when the key questions to resolve are the chance that the significant risked (pre-pilot) investment will lead to a ‘go’ decision, how often does a particular pilot design correctly predict viability or non-viability-and what the chance is that the entire venture will be an economic success. Failing to recognize the critical success factor-production profile uncertainty – and model this correctly, and develop appropriate prioritized learning objectives for the pilot. Ignoring the impact of business pinch-points, the scarce resource items which when controlled provide profit assurance and distinct competitive advantage. The failure to link the statistical assessment to operational priorities on project assessment or Play entry relegates business sense to an after-thought. The unfettered, unfocused "drill it and see what happens" approach results in sub-optimal pilots that fail to provide appropriate confidence for critical business decisions, destroys value, and risks loss of competitive advantage in an Unconventional Play.

Unconventional resource plays (e.g., tight gas plays, coal-bed methane, etc.) play an increasing role in the global energy budget. Those in the United States have attracted a lot of attention and study in recent years, but for many of the international unconventional plays, information regarding likely production rates, ultimate recoveries, development costs, and the overall profitability of these plays is often exceedingly scarce. As such, companies interested in pursuing these plays must make decisions regarding what information to acquire. Seismic surveys, regional studies, exploration/appraisal wells, pilot programs, etc. - all are possible sources of data regarding the ultimate behavior of the reservoir. Unfortunately, all are possible wastes of money and manpower, too. Maximizing the probability of financial success in these plays requires a thorough, consistent value-of-information (VOI) process. This paper presents an approach that emphasizes estimating the reliability of these information sources in a consistent way, including performing sensitivity analyses to see how the VOI changes by varying input parameters (including reliability). Results can give the decision-maker confidence in the decision to acquire information (or not to do so), and yield insights into the overall profitability of the venture. They also highlight those uncertainties that merit further attention, versus those that can be ignored (or must simply be accepted) for the time being. In the absence of VOI analyses, the value of highly uncertain opportunities can be grossly mis-estimated. Such analyses should play a key role in estimating the profitability of unconventional resource plays. Introduction VOI analysis is one of the most powerful and yet underutilized tools for evaluating the potential profitability of an asset, project, or opportunity. Such analysis usually assumes risk neutrality - i.e., that the decision-maker will always choose the option with the highest expected value (EV), regardless of the probability of success - but the calculations can be modified to accommodate risk-aversion. This paper will assume risk-neutrality (the reader should note that risk aversion causes the value of information to increase or remain the same, but never decrease). VOI analysis also assumes that the decision maker is open to alternative courses of action. Information adds value only if it convinces the decision-maker to choose a different path under some circumstances. If the path forward has already been decided (or if the optimal decision choice remains the same regardless of what the information tells us), acquiring new information is a waste of time and money. By itself, increased confidence in our decision adds no value. As this implies, we must identify the "money" decision - i.e., the decision that, if we get it right, will result in greater profitability. In the early stages of evaluating an unconventional play, this is usually the decision whether or not to proceed with acreage acquisition and development. We must also identify the key uncertainty or uncertainties, the parameter(s) about which we expect the new information to improve our understanding and narrow the range of possible values. In the examples in this paper, the degree of natural fracturing in a tight gas reservoir will be used for illustrative purposes. Value of information increases with:The probability of making the wrong decision in the absence of any new informationThe cost of making the wrong decision in the absence of any new information (including opportunity cost)The reliability of the information. In unconventional resource plays, the cost of error can be surprisingly low if the basic infrastructure for production is nearby (as it often is in the domestic United States). In tight gas plays, for example, dry holes are rare. Even disappointing wells usually produce some minimal volume, thus allowing the operator to recover some of the expenses associated with drilling, completing, and hooking up the well. If a nearby pipeline allows for the well to be brought onto production at minimal cost, the overall "cost of venture failure" may be low enough to reduce the value of new information to the point where it is not worth the expense of acquiring it.

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