Use of "Value of Information" Concept in Justification and Ranking of Subsurface Appraisal
Authors: Demirmen F. 
Published: December 2007

The "value of information" (VOI) concept can be applied to subsurface appraisal in petroleum exploration and production to provide an auditable, consistent criterion for justification of such activity. Based on this concept the "value" of subsurface appraisal can be defined as the difference in expected project (monetary) value with and without appraisal. Comparison of this value with the net appraisal cost provides a pragmatic decision tool for decision-making in subsurface appraisal. If the value is greater than the appraisal cost the appraisal is justified, otherwise it is not. Quantification of underlying uncertainty in probability form, and economic evaluation of alternative development scenarios as impacted by the uncertainty, are involved in the methodology. By extension of the concept, VOI can also be used as a ranking tool in a portfolio of subsurface appraisal activities. "Partial information" and unreliable information, both of which are common in practice, reduce the "value" of subsurface appraisal, and realistic evaluation of subsurface appraisal must take both of these effects into account. The VOI approach to subsurface appraisal helps avoid under- and overappraisal and could have a significant impact on upstream economics.

Introduction

Subsurface appraisal is a key activity in petroleum exploration and production, forming an integral part of hydrocarbon life cycle. It follows exploration discovery, and normally precedes any development activity. It is estimated that the industry spends roughly US$1 billion a year on subsurface appraisal. This estimate does not include costs related to well logging and seismic acquisition which, broadly speaking, are also appraisal activity.

Despite the large monetary stakes involved, the use of consistent, auditable criteria for subsurface appraisal is not widespread. Commonly stated reasons for subsurface appraisal, such as "delineation of the extent of the reservoir," or "gathering relative permeability data," while providing a technical basis for appraisal, are not in themselves sufficient reasons for spending resources for appraisal purposes. Nor are statements such as "… the appraisal will add xxxMMbbl of reserves." Just like any activity in the petroleum industry, subsurface appraisal must be justified on the basis of its economic merits, and a "value" must be attached to appraisal. The "value" is incremental project profitability or project NPV (net present value) attributable to appraisal, and can only be given on an expectation basis. It follows, as a corollary, that to be meaningful, subsurface appraisal must aim to impact decision with regard to field development.

With many exploration provinces in the world being in a mature stage, and new discoveries tending to be marginal, in particular in hostile environments such as deep offshore or the North Sea, the importance of subsurface appraisal to the upstream sector cannot be overemphasized. Corporate strategies aimed at optimizing subsurface appraisal are needed to safeguard upstream profitability, of major importance, in this respect, is avoiding under- or overappraisal, both of which represent waste of resources and impact project economics adversely. To achieve this, proper justification of sub-surface appraisal in the context of a realistic subsurface uncertainty model is essential.

In this paper it is proposed to use the "value of information" concept for subsurface appraisal justification, and by extension, for ranking a portfolio of appraisal candidates.

For brevity, the term "appraisal" will hereafter be used to refer to subsurface appraisal.

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