An Uncertainty Catalog for Oil and Gas Decision Making

All decision-making in the oil and gas industry is in the face of uncertainty. From reservoirs’ volume, well placement and concept choice, to facilities design and oil price, there is always a need to deal with uncertainty. An efficient way to study uncertainties in valuation and decision-making is to classify them into two major groups; public uncertainties, those that can be hedged using market instruments, and technical uncertainties, that are project-specific and have no relation to market movements. Commodity prices, such as oil and gas prices, are public uncertainties and by definition cannot be diversified away in a project. The prices not only have a large impact on the value of a hydrocarbon project but will also affect the important decisions during the course of a petroleum venture. There are several price processes available to model commodity prices; however the most relevant stochastic price process for valuing oil and gar projects is the two-factor model presented by Schwartz and Smith. Technical uncertainties are also present in every project. Not only these uncertainties must be quantified but we must also include a suitable a learning process in order to update the relevant probabilities in a consistent manner.