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).

TX 75083-3836, U.S.A., fax 01-972-952-9435. AbstractSuccessful exploration, efficient appraisal, and profitable extraction are the three phases of any E&P project; each in turn is dependent upon the prior. However, efficient appraisal of newly discovered resources sets the stage for maximizing project profitability and managing risk. The goal of an efficient appraisal program is to achieve maximum reduction in uncertainty with minimal cost. The more certain a company is regarding the size and scope of a particular project, the better decision it can make on its development case selection, the greater the possibilities for downside risk mitigation, and the more efficiently it can manage its entire development portfolio. The end of the appraisal period occurs when further uncertainty reduction would not materially effect the principle development decisions, or at the point at which the downside project risk becomes acceptable to the company.

Enormous effort and expense is put forth to explore for "sweet spots", but is it worthwhile? Is it even possible or, more importantly, a good business decision to attempt to explore for sweet spots? It is contended that, at a minimum, the vast majority of sweet spot exploration activity is wasted time and effort. Chasing the "golden carrot" leads to poor decision making and the investment of vast sums of capital in non-economic plays and basins. While the term "sweet spot" has taken on several different definitions over the previous decade, Industry seems to be settling on the definition being a limited area of productivity which falls within the upper quartile of the productivity of the opportunity. Ambiguity remains concerning the context, however, the concept and intent to drill the best possible productivity is a misguided remnant of the conventional mindset. Our quest should be to rapidly and efficiently evaluate a material area for economic development potential. In this, the understanding of what will eventually constitute a material opportunity is critical. Materiality ultimately delivers control and competitive advantage. While one may argue a coherent and valid sweet spot prediction method provides a competitive advantage, it does so later in the development phase and not during exploration. At best, sweet spot exploration is unreliable. In high variability reservoirs, the allocation of scarce resources to define successful sweet spot discovery is inefficient and destroys project value. Simply being "lucky" can derail an entire program as the intent shifts to focus on "successful" efforts while the typical well in the area under-produces for lack of engineering and geoscience attention. As such, sweet-spotting will fail to properly characterize the true economic potential of the opportunity. The drive to define the best, most productive locations within an acreage position misses the point that the value of the acreage will be the aggregated value of the entire developed area. To base development decisions on sweet spot results even in those rare instances when the "blind pig finds the truffle" over attributes causality, ultimately overvalues the opportunity and misleads investors. Sweet spot exploration oriented programs are based on imperfect interpretation are unreliable, potentially misrepresent the project potential and delay efficient development. The solution is to adhere to a fair and reliable assessment of the opportunity at hand. The early definition of material interest in a material play bodes well for the success of the company. Once the aggregate results have shown economic development potential of an area capable of providing distinct competitive advantage and control of the Company's domain, then sweet spot techniques come to the fore as they contribute to the efficient early capture of upside productivity. The quickest and lowest risk pathway into an unconventional opportunity is to seek a fair assessment of the entire opportunity, not simply the presumed sweet spot(s). The initial wells into an opportunity should be placed to provide confidence that the extent and productivity of the recoverable hydrocarbons present are greater than the project execution threshold… that what you have is at least as much as what you need to have in order to create/sustain a viable project. When we enter a play, we do so expecting the aggregate result to be positive. We need to avoid cloaking the development decision with a shroud of unreliable, unrepresentative early well results. Knowledge and figuring out the game is wonderful, but it needs to happen at the correct point in the development process.

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.

Industry needs to move away from standard, volume based, assessment of the success case that only involves the establishment of sufficient recoverable product, within a container of sufficient size, to enable a critical volume of product to be commercialized. Volume based techniques at best, whether deterministic or parametric, serve only to calculate the mean case and as such are insufficient to provide adequate information regarding the true economic potential of an asset or any decision management capability. Frequently, an assumption is made that the recovery factor (bbls per acre foot), or the individual components that lead to the calculation of a recovery factor equivalent, provides a valid assessment of production rate.Economic analyses of prospects tend to be based on and constrained by detailed earth-models, assessments of risk and uncertainty coupled with cursory, deterministic, and biased assessments of rate and production profile. The result is a fairly good record of Chance; finding recoverable hydrocarbons, and an over-estimation of the Uncertainty; finding sufficient hydrocarbons that will produce at economic rates through time providing at least a minimally acceptable volume. This results in economic over-estimation. We require a more rigorous, uncertainty ranged approach to rate and profile in order to provide a better assessment of the true potential and downside possibilities of exploratory and producing assets. Elements such as Initial Production Rate, Plateau Life, and Total Cumulative Production should be ranged as correlated elements to base reservoir properties such as porosity, saturation, and composition. For appraisal and development planning, the significance and extent of element correlation is assisted by links to an experimental design or other reservoir simulation process. It is our view that this can only be accomplished via the stochastic approach. Economic outcome is sensitive to initial rate and profile, sometimes to a greater degree than volume. A stochastic approach enables assessment of viability as profile pathways, facility constrained yearly ranges, or "discounted production". This enables identification of valid minimum completion criteria, or at least illuminates risk potential, and establishes a fairer representation of the distribution of expected outcomes. Introduction Over the last two decades volumetric assessment has been moving from deterministic methods to probabilistic methods of various detail. The impetus for change started in volume assessment since volume forms the basis for nearly all other calculations. The structure of many of the larger companies secludes the bulk of the earthscience population from production and reservoir performance. As a result, the classic methods of probabilistic prospect assessment remain volumetric and earthscience focused. However, the SEC requires reserve assessments, and as we've seen, discussion of proven, probable, and possible reserves, and their revisions dominate corporate reports and frequently the news. The pressure for companies to "be right" volumetrically is great. Yet little attention is paid to the truly important uncertainty of production profile variability and being "right" economically.