Improving Investment Decisions Using a Stochastic Integrated Asset Model

Abstract

<jats:title>Abstract</jats:title> <jats:p>This paper addresses the need for a holistic, integrated approach to assessing the impacts of uncertainty on oil and gas investment decision-making. We argue that this cannot be accomplished effectively by just adding a capability to deal with uncertainty to classical, rigorous models of all the components that contribute to an investment decision evaluation. Further, we suggest that such an approach, if feasible, is not desirable. Instead, we propose the concept of a Stochastic Integrated Asset Model (SIAM) embedded in a decision support system. This approach involves trading-off some technical rigor for a more complete and accurate assessment of the impacts of uncertainty on the investment decision-making process. The main elements of the system are: simplified component models for each domain; Monte Carlo simulation engine; modeling language for customization, incorporation of interdependencies between components, implementation of decision logic and updating information as a result of learning. We illustrate how such a system identifies which uncertainties impact the decision the most; values the acquisition of information (data, technical analysis) and encourages flexibility in go-forward plans to mitigate and/or exploit uncertainties. Further applications are to the optimization of development plans, real options valuation and the generation of consistent, risked cash flows for input to portfolio analysis. We believe that application of such a system results in a true value-driven focus to the work of multi-disciplinary asset teams through its ability to integrate the technical and business aspects of decisions.</jats:p>