How do Geologists Risk Oil and Gas Prospects?

How do Geologists Risk Oil and Gas Prospects?

Hydrocarbon exploration is a risky business. Oil and gas companies risk billions of dollars each year in trying to find new resources. In general only about 40% of exploration wells find hydrocarbons and only about 30% of exploration wells lead to potentially commercial discoveries. In frontier basins only about 10 to 15% of wells find hydrocarbons with less than 10% being commercial. The successful wells can lead to large earnings in the future which more than make up for the losses from dry holes over a period of time providing the company has a large enough portfolio of opportunities. As somebody who is into horse racing told me “it is like being given 10-1 odds on a 3-1 horse”.

What are the factors that determine if a well is a success or a dry hole?

 The five elements of a petroleum field.

All of these elements must work in order to have a discovery, if a single element fails then we have a dry hole. Risking is done by multiplying the estimated probabilities of the presence and effectiveness of these five elements. The probabilities are estimated as a decimal where P =1.0 is certain and P =0 is not possible.

COS (chance of success) = Source * Migration * Reservoir*Trap*Seal

1.      Source Rock – hydrocarbons are sourced from organic matter deposited in sedimentary rocks, mostly shales. This organic matter comes from decayed plants, animals and bacteria. Providing the organic rich rocks are buried deeply enough the resultant heat and pressure would convert the organic matter into hydrocarbons. Source rocks are relatively rare with 90% of the worlds petroleum generated from 6 discrete geological intervals where conditions were just right for preserving the organic matter.

2.      Reservoir Rock – Hydrocarbons are stored in porous rocks known as reservoirs. These are usually sandstones or limestones (carbonates), which can be deposited in a variety of settings from deserts, through deltas and reefs to deep sea sediment fans. The larger the porosity the greater the volume of hydrocarbons the reservoir can store, reservoir rocks have usually between 10% and 35% of the volume as pores. Larger porosities also tend to have greater permeability (the rate at which fluids can flow from the reservoir) although this relationship is not exact.

3.      Seal or Cap Rock – This is an impermeable rock located directly above the reservoir rock. The seal stops the hydrocarbon escaping as oil and gas are lighter than water and would if unimpeded float to the surface forming oil seeps. Cap rocks include shales and evaporates such as rock salt.

4.      Trap – As hydrocarbons are buoyant there needs to be a geological trap to stop them escaping.  Traps come in two basic types, structural and stratigraphic

Structural traps are when trap has been produced by deformation of the beds after they were deposited, either by faulting or folding.

Stratigraphic traps are when he trap is formed by changes in the nature of the rocks or in their layering.

Stratigraphic traps are harder to detect and more complex with more things likely to go wrong and leak.

5.      Migration (Hydrocarbon Charge) – This is the process by which hydrocarbons move from the source rock kitchen to potential traps via carrier beds. The migration needs to happen after the trap has been formed and when there is a sufficiently consolidated cap rock.

The elements are independent, except that a source rock is needed for migration and charge to be possible. Different companies may combine these elements in different ways. For example: reservoir may be split into presence and effectiveness, a sandstone formation may be present in a prospect but have poor reservoir properties.

Geoscientists do extensive work in order to try to understand and quantify these risks for example

1.      Structural seismic interpretation to produce a holistic picture of the geology and define potential traps.

2.      Basin modelling to try to predict migration pathways from source kitchen to reservoirs as well as trying to predict the pressure in the traps in order to estimate the seal capacity of the cap rocks

3.      Sedimentology to look at the distribution and quality of the reservoir rocks and try to predict their production performance

4.      Geochemistry to look at source rocks and their fluids

5.      Stratigraphy to look at the relative ages of the rocks and the timing of key events

6.      QI geophysics to look for geophysical direct hydrocarbon indicators to help reduce the risks further

7.      And several other specialities that try to quantify the risks

8.      And finally somebody to put it all together and come up with a risk and volumetric estimate.

The key aim of this work is to polarise the risks, that is kill or cure. This means taking a risk estimate from about 50% (we really don’t know) to either 80 % (it is highly likely) or 20% (it is highly unlikely) to try to enable a smarter exploration programme by removing prospects with flaws which make them highly unlikely to work.

How is risking done?

This is obviously dependent on company methods and procedures. Generally in larger companies the original interpretation team estimates each of these parameters and this is opinion then reviewed by a central review team who have a broader perspective and less emotional attachment to the prospect. Further review by fellow geoscientists leads to more positive scrutiny with more questions being asked which require answers. A particular advantage in my personal experience has been review by JV partners, competent fellow professionals from different companies, with views.

There numerous cognitive biases that do form a threat to truly objective risking such as: anchoring, taking analogues which may or may not be appropriate, optimism or pessimism, groupthink or clique think, focussing on too narrow a specific problem while not thinking about another, but mostly overconfidence in our ability to predict the geology. The only way we can try to overcome these biases is by effective challenge.

Probabilities and their meaning

Different people assign different probability numbers to the same words. For instance highly likely can be anything between 95% and 65% depending on the psychology and personal experiences of the estimator. Working in a multinational company brings another dimension in that people from different countries also have different perspectives and relative optimism or pessimism is estimating chance.

This table puts words to probability estimation numbers, helping geologists from different backgrounds explain what they mean by likely

This table shows typical risking values for different types of prospect, this should not be prescriptive but can give a sense check. However beware of potential anchoring bias.

What are geologists risking?

Generally the geologists risk the probability of finding the estimated volumetric range (normally given as a probabilistic estimate P90 to P10), this is the geological chance of success. This does not mean that the prospect would be economic as it is possible that if the discovery were to be developed it would not have a positive cumulative cash flow. The economic change of success is the geological COS multiplied by the percentile case of the minimum economic volume.

For example:  If the geological COS is 35%, and the 70th percentile of the volumetric estimate of recoverable hydrocarbons is the minimum economic volume then the economic COS is 0.35 *0.7 = 0.245.

To sum up exploration is a risky business, geoscientists are trying to quantify and understand the risks but these risks can never be eliminated. In estimating psychology is often as important as geology.