Value-of-Information Applications In Unconventional Resource Plays

Abstract

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.

Coalbed-Methane Pilots—Timing, Design, and Analysis

“…As such, the decision to proceed to the reconnaissance phase should be made with the benefit of a full understanding of the geological and commercial risks and a risked expected-value analysis from as comprehensive an assessment as is possible at this stage. Key uncertainties, the parameters for which new information will add value to the project, need to be identified at this stage (Leach et al 2007). Table 1 provides a simple list of parameters required by reservoir simulation to generate predictive production profiles; however, not all of these parameters may be necessary or key to the understanding and valuation of any one particular CBM prospect.…”

Considering value of information when using CFD in design

“…The value of information increases with the increasing probability of making a wrong decision in absence of new information and with the increasing cost of making a wrong decision absent of new information [11].…”