Jerry S.
Blinten
Probabilistic Development
Modeling
The oil industry is getting better at quantifying reservoir and production risks, but it still
struggles to determine their economic impact. New software integrates development
planning, economic modeling and risk analysis and provides the missing link to the bottom
line.
R isk analysis via Monte Carlo simulation is con-
ceptually simple, accounting for it's wide-spread
acceptance. Three key components are required
for any type of Monte Carlo analysis:
n Probability distribution functions describing the un-
certainty in important assumptions.
n Results that measure important project risks.
n A model to calculate these results.
Armed with these three components, Monte Carlo
simulation is a brute force technique. At each iteration of
the simulation, a value is sampled from the distribution
function for each assumption. Results are calculated
from the model and saved. After sufficient iterations, the
distribution of all possible results emerges.
This process is basically an extension of traditional
petroleum project decision making. In the past, common
inputs to decision making were a high, low, and ex-
pected case (HLE). In a sense, a Monte Carlo simulation
simply fills in the rest of the curve. In addition to pro-
viding an insight to the probability of possible results,
the shape of the result distribution curves provides the
decision maker additional information and offers addi-
tional methods of comparing projects.
One of the most useful results of a Monte Carlo
analysis is the measurement of the sensitivity of the re-
sults to the input assumptions. This sensitivity analysis is
most often presented as a tornado chart.
Quality control of Monte Carlo results is not much
different than quality control for traditional HLE case
analysis. The new twist is the requirement for the im-
portant assumptions’ probability distribution functions.
The ideal situation is to have actual data to build the dis-
tributions. However, it rare to have such information and
most often they are estimated with simple triangular,
normal or lognormal shapes.
The accuracy of the model and its representation of
the real world business problem are critical. Monte Carlo
simulations impose new requirements on oilfield devel-
opment models. In general, they must be more dynamic
Caesar Petroleum Systems
2500 City West, Suite 300 @1998 - All Rights Reserved
Houston, Tx 77042 Originally Published in Hart's Petroleum Engineer - Feb 1998
Torben Riis
than in the past and be able to handle a broader range of
inputs.
With the focus on profitability, most development
models are attempting to calculate financial measures
such as rate of return or present value. Typically, the
exploration, appraisal, and development phases of a pe-
troleum project are modeled in a spreadsheet. The
spreadsheet generates a forecast of capital and operating
expenses (cash flow) and production. These profiles are
then linked to an economic analysis program or sheet,
which applies a tax and deal structure.
This structure of spreadsheets and financial analysis
programs is useful for simple types of Monte Carlo
problems. However, the combination is often difficult to
generalize. Without significant programming effort,
spreadsheets are relatively static. For instance, well
spacing might be an important input assumption. If it is,
the spreadsheet must be able to calculate the number of
wells required and build a drilling schedule at each it-
eration. Most often, time (either starting dates or elapsed
time) will be an important variable. It is not trivial for a
spreadsheet to adjust spending and production profiles at
each iteration.
Petroleum Ventures And Risk
To overcome the limitations of Monte Carlo analysis
with spreadsheets and financial programs, a new soft-
ware program called PetroVR was developed by Caesar
Petroleum Systems. PetroVR begins with a rigorous de-
terministic model of petroleum projects from conception
through abandonment. The key components of the model
are:
n Descriptions of reservoir, well and facility re-
sources.
n Process flow diagrams describing the development
system and fluid flow.
n Timelines describing key events in the exploration,
appraisal and development schedule.
n Constraints on rig schedules and facility capacities.
Page 1
 Jerry S. Blinten
Torben Riis

Devonian Waterflood Simulation Results Dimensionless Simulation Results

Single Well Single Well
2500 2500 1 1
Oil Rate
Oil Rate
0.9 Water Rate 0.9
Water Rate
Average Curves
2000 2000 0.8 0.8

Water Rate (BWPD)

Dimensionless Oil
Oil Rate (BOPD)

0.7 0.7

Water Cut
1500 1500 0.6 0.6

Rate
0.5 0.5

1000 1000 0.4 0.4

0.3 0.3

500 500 0.2 0.2

0.1 0.1

0 0 0 0
0 5 10 15 20 25 30 0 0.2 0.4 0.6 0.8 1

Production Years Dimensionless Cumulative Production

Figure 1 These curves are reservoir model predictions covering Figure 2 This set of curves shows reservoir model predictions con-
the range of expected permeability, net pay and water saturation. verted to a dimensionless format. The red curves are the average
dimensionless well performance used in PetroVR.

Based on this information PetroVR will automati-
cally adjust the exploration, appraisal and development
schedules. It will then generate cash flow and production
profiles. These profiles are routed to PetroVR’s eco-
nomic system. The program includes a financial model-
ing language capable of modeling any fiscal regime and
deal structure.
In its probabilistic mode, PetroVRTM allows any ex-
ploration, engineering or financial variable to be a risked
input. At each iteration of a Monte Carlo simulation, the
full development model is executed and financial meas-
urements calculated. This allows each discipline to di-
rectly measure the effect of their uncertainty on full-
cycle economics.
Evaluating An FSU Oil & Gas Project
A major western oil company was considering bid-
ding on a license in the Former Soviet Union (FSU)
containing two discoveries. The major risks associated
with projects in the FSU are often different from tradi-
tional exploration risks. In the west, volumetric and re-
covery risks generally overshadow risks associated with
production and export, whereas in the FSU drilling and
production costs are often the biggest unknown.
PetroVR was selected for its capability to model and
perform integrated risk analysis on the entire explora-
tion, production and abandonment cycle.
Discovery A, of Devonian age, had been explored by
15 wells drilled by a non-western operator. And although
the well data were sparse and of poor quality, the dis-
covery was fairly well delineated. Discovery A consisted
of one reservoir zone. Interpretation of porosity logs was
questionable, but showed consistently low porosities
degrading with depth. The majority of the well tests were
shorter than one hour, and never produced oil to the sur-
face.
Less information was available for the smaller Devo-
nian Discovery B. It appeared to have reservoir charac-
teristics similar to Discovery A. However, regional ero-
sion had reduced the pay thickness relative to Discovery
A. Nine wells had been drilled and logged, and only two
short well tests had been conducted. The well test data
indicated rates comparable to Discovery A, however,
API gravity was measured at about 40o, compared to 30o
for Discovery A.
A 160-acre five-spot reservoir sector model of Dis-
covery A was built to evaluate the range of production
profiles to be expected. The lack of rate history to tie
down the initial rates forced the engineers to essentially
run the model unconstrained. It was assumed that injec-
tion wells would initially produce 10% of the reserves
contained in their drainage area and then be converted to
injectors.
Fig. 1 shows the range of oil and water simulation
output obtained by varying reservoir parameters such as
permeability, net pay and saturation curves (Fig 1).
PetroVR includes an option for production profiles to
be expressed in a dimensionless format as a function of
dimensionless cumulative production. Fig. 2 demon-
strates that the transformed simulation output curves
have similar characteristics, and the average dimension-
less curve shown in red was assumed to represent the
average well performance in dimensionless terms. Pet-
roVR allows well reserves, initial rate, and initial GOR
to be risked variables. This enables a probabilistic as-
sessment based on reservoir model results. Discovery

Caesar Petroleum Systems Page 2

2500 City West, Suite 300 @1998 - All Rights Reserved
Houston, Tx 77042 Originally Published in Hart's Petroleum Engineer - Feb 1998
 Jerry S. Blinten
Torben Riis

PC

LC
LC

A Pad Gas Re-injection

Corrosion
Inhibitor

Process Facility Biocide

Auto Water Processing Expansion 1

Oxygen
Scavenger

Chlorination

Discovery B 3-phase Pump Station Water Injection System

B Pad

Export Facilities

Fig. 3 - This schematic shows the initial process system considered for the project.

B was also expected to be developed by a five-spot wa- ing 20 wells each. Initial water processing capacity was
terflood. But rather than building a simulation model for 10,000 b/d. PetroVR was allowed to automatically add
Discovery B, it was decided to use the dimensionless additional water processing capacity of 50,000 b/d when
curve already created for A and only change initial rate needed. High water cut wells would be shut in, as
and reserves per well. Discovery B injectors would not needed, following the water processing expansion.
produce any of their reserves, but be immediately placed The company was hoping to negotiate a tie-in to an
on injection. existing oil pipeline and expected to re-inject produced
The surface facilities consisted of a single process gas.
train with a total fluid capacity of 80,000 b/d at a central After entering reservoir, production, drilling and fa-
location on Discovery A. A pump would be installed on cility data in PetroVR, the process flow system and the
Discovery B, feeding a 10-mile, 3-phase pipeline to Dis- initial development schedule was created (Fig 3 and Fig
covery A. A return line piped injection water to Discov- 4).
ery B. Drilling would take place from gravel pads hold- PetroVR calculated that 132 wells were required to
97 98 99 00 01 02 03 04 05 06 07 08 09 10

Signature Bonus
Central Production Facilities
Build Infrastructure (roads, camps etc)
Engineer and Build Process Facility
Build Gas Re-injection
Build Water Injection System
Build Export Facilities
Lay and hook-up Export Pipeline
Mobilize Development Rigs
Construct and Drill from A Pad
Construct and Drill from A Pad V1
Construct and Drill from A Pad V2
Construct and Drill from A Pad V3
Build Discovery B 3-phase Pump Station
Construct and Drill Wells on B Pad
Construct and Drill Wells on B Pad V1
Construct and Drill Wells on B Pad V2
Auto Water Processing Expansion 1
0 3 5 8 10

Discovery A Rigs
0 1 3 4

Discovery B Rigs

Fig. 4 - This timeline shows the initial sequence of key events considered for the project .

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2500 City West, Suite 300 @1998 - All Rights Reserved
Houston, Tx 77042 Originally Published in Hart's Petroleum Engineer - Feb 1998
 Jerry S. Blinten
Torben Riis

Process Facility
80 0.08
70 0.07
60 0.06
50 0.05

(B scfpd)
(M bpd)

40 0.04
30 0.03
20 0.02
10 0.01
0 0
99

03

05

09

13

15

19

23

25

29
01

07

11

17

21

27
19

20

20

20

20

20

20

20

20

20
20

20

20

20

20

20
Oil (M bpd) Water (M bpd) Oil Capacity Water Capacity Gas (B scfd) Gas Capacity

Fig. 5 - This graph shows capacity and production at the central Process Facility for the initial system.

Distribution for NPV @ 20%

Unit Discovery A Discovery B
Depth Ft 10,000 10,000
0.14
Area Acres 12,500 7,000
0.12 Thickness Ft 150 80
Porosity % 10 10
PROBABILITY

0.1
0.08 Oil Saturation % 60 60
0.06 Recovery Factor % 35 35
0.04 Permeability md 25 -
0.02 Oil Reserves MM bbl 255 81
0 Initial Oil Rate b/d 4,000 2,000
Oil Quality APIo 40 30
0

.3

.3

.4

.4
.2
5.

6.

7.

8.

9.

11

12

13

14
10

Values in Ten Millions

economic model for a Production Sharing Agreement
previously created in PetroVR was modified and used
Fig. 6 - This bar chart show the distribution for this project.
of NPV @ 20% for initial system considered. Initial production rate, porosity, recovery factor, net
develop both reservoirs. It then automatically built well pay, drilling time and process facility costs were consid-
pads, laid out the drilling schedule and calculated the oil, ered the major uncertainties. The values for these pa-
gas and water production. The rig schedules were con- rameters were entered as triangular distributions in Pet-
strained by having three rigs on A and two rigs on B. roVR. Subsequently, full cycle risk analysis was per-
The oil rate was automatically constrained by choking formed on the model. Full cycle risk analysis is based on
back production. Water processing capacity was ex- Monte Carlo simulation of the entire development
panded and high watercut wells were temporally shut in. schedule. Production profiles and economic model re-
Blending calculations were also made at the process fa- sults are re-calculated in each iteration cycle (Fig 6 and
cility (Fig 5). Fig 7). Results for the net present value of the project,
To handle the cost and production profiles generated discounted at 20%, and the sensitivity of the risked in-
by the development planning section of PetroVR , an puts on NPV are shown in Table 1.
Noting the sensitivity of Discov-
Regression Sensitivity for NPV @ 20% ery A's volumetric parameters
Discovery A: Net Pay helped convince the operator to run
Discovery A: Rec Factor
Devonian Drilling: Drilling Time
3-D seismic over the structure before
Discovery A: Reservoir Area making any development decisions.
Discovery B: Reservoir Area
Processing Plant: Cap Ex To reduce risks even further, ap-
Discovery B: Rec Factor
Discovery B: Net Pay
praisal wells would also be drilled
Development Pad: Cap Ex
on both structures.
-6.00E-01 -4.00E-01 -2.00E-01 0.00E+00 2.00E-01 4.00E-01 6.00E-01 8.00E-01 1.00E+00
Well productivity and viability of
Std b coefficient
water injection remained a major
Fig. 7 - This column chart shows the sensitivity of the risked inputs concern due to the lack of reliable
on NPV @ 20% results.
Caesar Petroleum Systems Page 4
2500 City West, Suite 300 @1998 - All Rights Reserved
Houston, Tx 77042 Originally Published in Hart's Petroleum Engineer - Feb 1998
 Jerry S. Blinten
Torben Riis

97 98 99 00 01 02 03 04 05 06 07 08 09 10
Signature Bonus
Shoot 3D Seismic on Discovery A & B
Build Discovery A Appraisal Pad
Mobilize 1st Rig on Discovery A
Drill Devonian A Appraisal Well
Drill 3 Discovery A Pilot Wells
Mobilize Pilot Test Equipment
Conduct 6 month Pilot Injection Test
Mobilize Discovery B Rig
Drill Discovery B Appraisal Well
Drill 3 Discovery B Appraisal Wells
Prepare Declaration of Commerciality
Declare Commerciality
Central Production Facilities
Mobilize 2nd Discovery A Rig
Construct and Drill from Discovery A Well Pads
Construct and Drill from Discovery A Well Pads V1
Construct and Drill from Discovery A Well Pads V2
Construct and Drill from Discovery A Well Pads V3
Engineer and Construct Discovery B 3-phase Pump Station
Construct and Drill Wells on Discovery B Pads
Construct and Drill Wells on Discovery B Pads V1
Construct and Drill Wells on Discovery B Pads V2
0 3 5 8 10

Discovery A Rigs
0 1 3 4

Discovery B Rigs

Fig. 8 - This timeline shows the key events required to implement an appraisal program and pilot
waterflood.
well test data. An injection pilot consisting of one injec- It was therefore decided to investigate the economical
tor and three producers was therefore considered. Simu- implications of constructing the injection pilot, followed
lations showed that 6 months of injection would be suf- by the creation of a development schedule in PetroVR
ficient to estimate sweep efficiency. However, the costs (Fig 8).
associated with the pilot were high, since new wells had The major objective of a water injection pilot is to
to be drilled. Also, due to the high cost of any type of reduce the risk that field-wide water injection might fail
export system, re-injection of the oil was required. to achieve the desired recovery and production perform-
Develop w ith pilot (Rf 35%)
Waterflood Success? Yes 90.0% NPV at 20: 78.0 $ MM
68.5 $ MM
Yes 70.0%
Pilot Success? Develop w ith pilot (Rf 15%)
35.2 $ MM NPV at 20: -17.1 $ MM
Develop w ith Pilot No 10.0%

Development Decision Pilot Fails

67.0 $ MM No 30.0% NPV at 20: -42.5 $ MM

Develop w ithout pilot (Rf 35%)

Yes 63.0% NPV at 20: 108.2 $ MM
Waterflood Success?
67.0 $ MM
Develop w ithout Pilot
Develop w ithout pilot (Rf 15%)
No 37.0% NPV at 20: -3.2 $ MM

Fig. 9 - This decision tree shows the economic results of the project with
and without a waterflood pilot.

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2500 City West, Suite 300 @1998 - All Rights Reserved
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ance. Pilots can be quite expensive, particularly if the
produced oil cannot be sold. Additional downsides of
pilots normally include delaying the project start date
and oil revenues.
A relatively simple decision tree was created in Pet-
roVR to resolve the whether the injection pilot should
be built (Fig 9). The end “value” on each result node is a
full project model. The failure branches were simply
created from the success cases by reducing the recovery
factor to 15 %.
Fig. 9 shows the large negative financial impact of
the pilot and fairly small exposure on the waterflood
failure case. This tree, along with the additional infor-
mation which will be gained during the appraisal pro-
gram, helped convince the operator to forgo the pilot.
The operator considers the production risk analysis
process and PetroVR software essential in presenting the
winning bid for these properties with confidence in the
project's profitability. The process and software helped
the operator focus on reducing the key risks through the
Caesar Petroleum Systems
2500 City West, Suite 300 @1998 - All Rights Reserved
Houston, Tx 77042 Originally Published in Hart's Petroleum Engineer - Feb 1998
Jerry S. Blinten
Torben Riis
appraisal program and ignore the additional waterflood
pilot expense. This example demonstrates the impor-
tance of measuring all key risks, with their impact on the
development plan, against full cycle economics.
ABOUT THE AUTHORS
Torben Riis is vice president of engineering at
Caesar Petroleum Systems. Prior to joining Caesar,
he held positions with Timan Pechora Co., Norsk
Hydro and Maersk Oil & Gas. Torben holds a MS
in mechanical engineering from the Technical
University of Denmark and an MBA from
INSEAD. Torben is a member of SPE. His e-mail
address is: riist@caesarsystems.com.
Jerry S. Blinten is president of Caesar Petroleum
Systems. Prior to joining Caesar, he worked with
Amoco Production Co. and Schlumberger. Jerry
holds BS degrees in physics and mathematics from
North Carolina State University. He is a member of
SPE and SPWLA. His e-mail address is:
jblinten@caesarsystems.com.
Page 6