SPE 77422
Sums and Products of Distributions: Rules of Thumb and Applications
James A. Murtha, Consultant
Copyright 2002, Society of Petroleum Engineers Inc.
This paper was prepared for presentation at the SPE Annual Technical Conference and
Exhibition held in San Antonio, Texas, 29 September 2 October 2002.
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Abstract
When n probability distributions are added, the Central Limit
Theorem provides estimates of the mean and standard
deviation of the result. One useful consequence is that the
relative uncertainty as measured by the coefficient of variation
the ratio of standard deviation to mean- shrinks by a factor
of roughly n. What can be said about the mean and standard
deviation of a product of distributions? Both sum and product
formulas abound in the oil and gas business. While Monte
Carlo simulation generates the appropriate output distribution,
some rules of thumb are useful in advance.
Introduction
Sums are normal and products are lognormal are useful
generalizations when doing uncertainty analysis. Both
assertions are widely recognized, if not always fully
understood or appreciated. The oil and gas industry uses
product models extensively for resource and reserve
estimation and sum models to aggregate production and
reserves. The starting point for our investigation is the oft
mentioned Central Limit Theorem, which tells us how sums
behave in terms of their summands. The challenge is to find a
suitable analog for products and then to test the approximation
on field examples.
Problem Statement
The Central Limit Theorem tells us that under rather
restrictive hypotheses (the summands are identical,
independent, and normal), the sum of n distributions is
normal. More importantly, we can relax the assumptions and
demonstrate by simulation the following remarkable facts:
1. The sum of n distributions of any type is approximately
normal
2. Its mean is equal to the sum of the means of
the components
3. Its standard deviation is approximately equal to the sum
of the standard deviations of the components times n.
4. And as a consequence of 2 and 3, the Coefficient of
Variation, which we denote here as R, shrinks by a
factor of n.
Can we find similar facts about the product of n distributions?
Investigation
Regarding 4, recall that the R, the Coefficient of Variation or
Variability, is the ratio of standard deviation to mean. This
dimensionless statistic is a common measure of dispersion.
Rather than say that a variable has a standard deviation of 32
units of whatever were measuring, we usually use the
definition of the R to say instead that the standard deviation of
the variable is 5% of the mean (very tight) or 40% of the mean
(widely dispersed). Recall that for normal distributions, the
ranges of one, two, and three standard deviations to each side
of the mean account respectively for 68%, 95%, and 99.7% of
all the data. Thus when someone says plus or minus 10%
(by which we understand the entire range to be between 90%
and 110% of the mean) they are referring to a variable with a
standard deviation of slightly more than 3.3% of the mean, or
an R of about .033.
When do we add distributions?
We add distributions (sometimes called aggregation)
whenever we a) add line item costs to get total cost of drilling
a well or constructing a pipeline, b) add reserves from
different fields, c) add production from different wells. Thus,
adding distributions is a common operation in analyzing
uncertainty. So according to the remarkable facts, these
aggregations will generate an estimation of the values of the
statistics we are seeking that is far more precise than the
components. In other words, if we add 10 line items, each
represented by a distribution whose min and max can be 30%
from the mean, then the aggregate will be a distribution whose
min and max may deviate from the mean by only about 10%.
While this fact is generally regarded as helpful in arriving at
estimates, most people dont realize that it can also uncover
inconsistencies in our logic.
Using these facts to discover errors in logic
One case in point is the pitfall of assigning conservative
2 JAMES A. MURTHA
reserves, say P10 values, for individual fields only to learn
that the aggregation of these values can grossly underestimate
the reserves for a business unit comprised of these fields.
Another pitfall is when line item costs are represented by
skewed right distributions and their modes (peaks) are taken as
the base cost and summed to get a base value for the total cost:
the result is much too conservative, and can have less than a
1% chance of occurrence.
What About Products?
What can we say about taking products of distributions, which
is another common operation in uncertainty analysis? Before
we present more Remarkable Facts, recall two things about
products:
the logarithm of a product is the sum of the logs of the
factors, and
a lognormal distribution is simply one whose logarithm is
normal.
Thus if
Y = X1 *X2 **Xn ,
Then
Log(Y) = Log(X1 )+Log(X2 )++Log(Xn ),
The Central Limit Theorem assures us that the latter is
approximately normally distributed, so that Y must be
approximately lognormal. Thus,
1. The product of distributions is approximately
lognormal
What about the other two aspects of the Central Limit
Theorem?
Can we say that the product of the means is the mean of
the product?
In addition, what can be said about the coefficient of
variation of the product?
The first of these is true, is detailed in the Appendix, and can
be found in many statistics books, PROVIDED there is NO
CORRELATION among the factors Xi .
2. Mean of Y = Product (means of Xi )
The analog for the standard deviation, unfortunately, is more
complicated. Whereas the R of a sum shrinks, the R of
products expands. We prove in the Appendix that:
3. REstimate1 1+ Ry2 (1+ Ri 2 )
This can be simplified somewhat with a little loss in accuracy
to
REstimate2 RY ( Ri2 )
When the Rs are similar, we get
REstimate3 RY n*R
In other words,
Adding similar distributions shrinks the R by about a
factor of n;
Multiplying similar distributions expands the R by
about a factor of n.
Only experience will reveal how good these approximations
are in practice, when the components to be added or multiplied
SPE 77422
are dissimilar. We concentrate on cases where the output is a
product of distributions, since they are so popular in the
petroleum literature.
Applications
The most common example of a product of distributions is a
volumetric estimate of hydrocarbon in place or reserves. We
illustrate the approximation method with four examples from
the literature. The distributions include triangular; triangular
specified by P10, mode, and P90; normal; lognormal; and
truncated normal.
Whereas the normal and lognormal distributions are typically
specified with their mean and standard deviation, making the
R simple to compute, all the other distribution types require
either fancier formulas or simulation to obtain estimates of
their mean and standard deviations.
For triangles, we have the simple formulas (where L, M, H are
min, mode, max)
Mean = (L+M+H)/3
Variance = (L2 + M 2 + H2 LM LH MH)/18
Stdev = sqrt(Variance)
When P10 and P90 are specified instead of L and H, there is
no closed form equation for L and H. One can either use an
iterative procedure outlined by Murtha and Janusz1 or simulate
to estimate the values of mean and Stdev.
Because our approximation assumes that the output is a
product of the inputs, it is sometimes necessary to transform
some of the variables. For instance, if we start with Sw, then
we must convert to So or Sg, which is (1-Sw). If we start with
Bo, we must convert to 1/Bo, and so on. A simple way to find
the appropriate distribution for the transformed variable is to
run a simulation. The following examples illustrate how
closely REstimate1 and Restimate2 approximate the simulated
value. To use REstimate3, the inputs must have similar Rs.
Example 1. Cronquist2 used triangular distributions by
specifying the P10, mode, and P90 values rather than the
conventional P0 (min), mode, and P100 (max). We used a
utility program (ref, Murtha) to get the actual P0 and P100,
then calculated the Rs and confirmed them with simulation.
The inputs had Rs ranging from about 0.1 to 0.3. The
simulated output R was 0.534 and the approximations are
0.551 and .525. Details are in Table 1.
Example 2. Davis 3 uses extensive data to model a Lansing-
Kansas City prospect in the Central Kansas Uplift. Using
lognormal distributions for area and net pay, Davis switches to
normal distributions for porosity, saturation and recovery
factor, truncating each of these. Porosity is truncated at the
low end to honor a judgment that less than 2% porosity is
nonproductive and at the high end (30%) in keeping with a
report on carbonate reservoirs in the US. While the low cutoff
does alter the distribution a little, the high cutoff is four (!)
standard deviations above the mean. Likewise, his cutoffs of
0% and 100%, intended to guarantee that the sampled values
are meaningless, in fact do little to alter the mean and standard
deviation. Area is a highly skewed distribution, with R of
1.04, and thereby dominates the product. Here the first order
approximation yields 1.40 compared to the approximations of
1.36 and 1.21.
SPE 77422 SUMS AND PRODUCTS OF DISTRIBUTIONS: RULES OF THUMB AND APPLICATIONS
Example 3. Caldwell and Heather4 used a product of five
triangular distributions to estimate gas reserves in a coal seam
under a desorption driving mechanism. Two of the
distributions were sharply skewed left. Of course, the product
is skewed right. The inputs have Rs ranging from 0.01 to 0.39.
Using 2000 trials, the output has an R of 0.561 and the
approximations are 0.560 and .535.
Example 4. Murtha5 used three distribution types for his five
inputs: normal, lognormal and triangular, with Rs ranging
from 0.067 to 0.400. The output R is 0.445 and Restimates 1
and 2 are 0.445 and .439. Note that the original description
used a triangular distribution (0.2, 0.3, 0.45) for Sw, which
easily converts to another triangular (with opposite skewness),
for So, namely (0.55,0.7, 0.8). We also had to convert the
distribution, Normal(1.34, 0.06) to an appropriate distribution
for 1/Bo. Simulation showed this reciprocal to be
approximately Normal(0.75, 0.034).
Correlation effects
None of these examples of products considered the
complicating effects of correlation among inputs. When
variables are correlated both the mean and the standard
deviation can be affected. In general, volumetric estimates of
reserves are more likely to have positive correlations between
pairs of inputs. For instance, typical pairs of correlated
variables are
area and net pay
porosity and hydrocarbon saturation
net pay and recovery efficiency
net-to-gross ratio and porosity.
It is much easier to imagine geologic reasons for positive than
negative correlations between these paired variables. When
all the correlations are positive, then it is easy to predict the
direction but not the extent of the impact of correlation: We
can make the following generalization (but remember what
Oliver Wendell Holmes said: No generalization is worth a
damnincluding this one) based on numerous simulations in
a classroom setting.
Positive correlation between one or more pairs of inputs
to a product can increase the mean of the product by as
much as 8 or 10% and the standard deviation by as much
as 40 or 50%, depending on the strength of the
correlation.
The impact on R is to increase it beyond the uncorrelated
product, by as much as 30%
For Sums, the remarkable thing is that the mean is not affected
by correlation, but the standard deviation is. Thus, we can
generalize:
Positive correlation between one or more pairs of inputs
to an aggregation can increase the standard deviation and
thus will increase the R by the same percentage. While
the impact depends on the number and strength of the
3
correlations, the result would typically be less than a 50%
increase in R.
One MUST regard each case separately. It is often true that
correlation makes little difference in the outputs.
Summary
Let Y = X1 *X2 **Xn ,
Then
1. Y is approximately lognormal
2. Mean of Y Product (means of Xi ), with equality
prevailing when the factors are independent
3. 1+ Ry2 (1+ Ri 2 )
Which can be further approximated by
R1 RY ( Ri2 ) in general
And
R2 RY n*R, when the Rs are similar.
Acknowledgment
Wilton Adams was kind enough as usual to lend his critical
eye. Several years ago, Dave Morgan and I had some
correspondence relating to the product of medians and modes
for lognormal distributions, in which he used this R2 +1 term.
I had forgotten all about it until I was in the thick of writing
this paper. So I suspected he knew this stuff all along. At any
rate, he deserves some credit for planting some seeds in my
brain. Now as the paper goes to press, Dave tells me he and I
should both be indebted to his former colleagues at BP, P. J.
Smith, D. J. Hendry and A. R. Crowther6 . As I read their
paper, I realize there is some overlap and urge the reader to
have a look at both.
References
1. Murtha, J.A. and Janusz, G.J., Spreadsheets Generate and
Validate Uncertainty Distributions, Oil and Gas J. 13 March
1995
2. Cronquist, C.: "Reserves and Probabilities -- Synergism or
Anachronism?," JPT, Oct. 1991, p. 1258-1264.
3. Davis, John C., Risk Assessment for the Independent
The Monte Carlo Approach, Geobyte, vol. 7, No. 6,
December 1992, January 1993, p. 57-65.
4. Caldwell, R.H. and Heather, D.I.: "How To Evaluate Hard-
To-Evaluate Reserves," JPT, Aug 1991, p. 998-1003.
5. Murtha, J. A.Monte Carlo Simulation: Its Status and
Future (Distinguished Author Series), JPT, (April 1997) 361,
also presented as paper SPE 37932 at the 1997 Annual
Technical Conference and Exhibition, San Antonio, 5-8
October 1997
6. Smith, P. J., Hendry, D. J., and Crowther, A. R., The
Quantification and Management of Uncertainty in Reserves,
paper SPE 26056 presented at the Western Regional Meeting
held in Anchorage, Alaska, U.S.A., 26-28 May 1993.
4 JAMES A. MURTHA SPE 77422

Appendix Finally, when the Ri are approximately the same, we can

We state here without proof two well known facts. approximate
Let X and Y be random variables and let Z be their sum. Then Ry2 + 1 (R2 + 1)n = 1+ n R2 + + R2n
Z = X + Y (1)
Moreover, if X and Y are independent, then their variances are Ignoring everything after the first two terms,
additive: Ry2 nR2
Z2 = X2 + y2 (2) Ry sqrt(n)*R
Let A = Lognormal(, ), a lognormal distribution with mean To generalize then,
and standard deviation, . For any distributions, A i , letting
By definition, the natural logarithm of A is a normal Y = A i = A 1 *A2 **An
distribution, specifically We have the approximations
Ln(A) = Normal (1 , 1 ), a normal distribution with mean 1 , ( Ri2 + 1) Ry2 + 1 REstimate1 (5)
and standard deviation, 1 , where 6 and when the Ri are similar (to R, say) in variance,
1 = Ln(2 /sqrt( 2 + 2 )) Ry sqrt(n)* R (REstimate2)
12 = Ln(( 2 + 2 )/ 2 ) Even if the Ri are not similar, we can go a step further and
Putting R = / , the coefficient of variation, we have argue
12 = Ln(R2 + 1) Ry2 + 1 ( Ri2 + 1) =1 + Ri2 + + Ri2
Now let Y = A i = A 1 *A 2 **A n Since, in general the powers of Ri2 are small, we again ignore
Where A i = Lognormal(1, 1 ) and assume further that they are all but the first two terms and get
independent.
Put Z = Ln(Y) = Ln(A 1 )+Ln(A 2 ) ++Ln(A n ) = Ln(A i ) Ry2 Ri2
By the Central Limit Theorem, Z is normal and hence Y is so that
lognormal. Moreover, from (1), Ry sqrt(Ri2 ) (REstimate3)
z = Ln( i /sqrt( i + i )) = Ln( 2i / sqrt ( i2 + 2i ))
2 2 2

But since Z = Ln(Y),

z = Ln( y /sqrt( y + 2y ))
2 2

Thus, exponentiating both sides,

2i / sqrt ( i2 + 2i ) = 2y /sqrt( y2 + 2y ) (A)
From (2),
z2 = Ln( Ri2 + 1) = Ln(( Ri2 + 1))
But also z = Ln( R y2 + 1), so that
2

( Ri2 + 1) = Ry2 + 1 (3)

or
(( + 2i )/ 12 ) = ( y2 + 2y )/ 2y
2
i (B)
We have now shown that for special cases (products of
independent lognormal distributions), the statistic R2 + 1 is
preserved by products.
Multiplying the left hand side (LHS) of A with the LHS of B
and setting that equal to the product of the right hand side
(RHS) of A with RHS B, then squaring both sides gives
( i + 2i ) = y2 + 2y
2
(A)
Setting equal the square of LHS A and LHS B with the square
of the RHS A and the RHS of B then taking roots of each side
yields
i = y (4)
which says that the product of the means is the mean of the
product (assuming the factors to be lognormal and
independent).
SPE 77422 SUMS AND PRODUCTS OF DISTRIBUTIONS: RULES OF THUMB AND APPLICATIONS 5

Cronquist Triangular with P10, mode, and P90 specified

P10 Mode P90 Mean Std Ractual REstimate1 REstimate2
ac Area 20 40 50 35.70 11.12 0.312
ft net pay 15 25 30 22.85 5.56 0.243
frac So 0.5 0.6 0.65 0.578 0.056 0.096
frac porosity 0.1 0.2 0.25 0.178 0.056 0.312
frac E function of h, phi, sw 0.217 0.025 0.114
STB Reserves 435632.5 232543.3 0.534 0.551 0.525
Table 1. Comparison of R-values for actual and two approximations, Cronquist paper.

Davis Lognormal and truncated Normal

Truncation
dist type Mean Std Low high trueMean trueStd Ractual REstimate1 REstimate2
Lognormal Area 92 96 92 96 1.043
Lognormal Thickness 12 4 12 4 0.333
TNorm porosity 0.1 0.05 0.02 0.30 0.106 0.045 0.422
TNorm So 0.7 0.1 0.00 1.00 0.700 0.099 0.142
TNorm RecFac 0.3 0.075 0.00 1.00 0.300 0.075 0.250
STB Reserves 188121.5 255948.4 1.36 1.40 1.21
Table 2 Comparison of R-values for actual and two approximations, Davis, Harbaugh book.
Caldwell& Heather Triangular

units min Mode max mean Std Ractual REstimate1 REstimate2

acre Area A 20 320 640 326.7 126.6 0.39
ft NetPay h 30 60 70 53.3 8.5 0.16
scf/ton GasContent C 200 350 550 366.7 71.7 0.20
ton/ac-ft Density rho 1800 1825 1850 1825.0 10.2 0.01
fraction RecFac Er 0.10 0.50 0.60 0.400 0.11 0.27
Bcf Reserves G 4.655 2.610 0.561 0.560 0.535
Table 3. Comparison of R-values for actual and two approximations, Caldwell-Heather paper.

Murtha Lognormal, normal, triangular

Min Mode Max Mean std Ractual REstimate1 REstimate2
lognormal Area N/A N/A N/A 2000 800 0.400
normal Pay N/A N/A N/A 45 3 0.067
normal porosity N/A N/A N/A 0.14 0.02 0.143
Triangular So 0.55 0.7 0.8 0.683 0.05 0.075
Normal 1/Bo N/A N/A N/A 0.8 0.0 0.045
MMSTB Oil in Place 50.07 22.28 0.445 0.445 0.439
Table 4. Comparison of R-values for actual and two approximations, Murtha paper.