Exploration

The typical cost of an exploration well is today USD 15 million, and in the last decade the exploration has amounted to 10 to 30 percent of the accrued investment costs. Including exploration in the model should therefore improve the analysis significantly.

The basis for the reservoir assessment is the operator’s a priori probability distributions of the(technically recoverable) reservoir volume and the well rate. These distributions are typically obtained through seismic surveys (the volume) and wildcat wells. However, it is possible for the operator to obtain more information about the reservoir volume before the development starts (i.e., the operator has what is here termed information flexibility). In the model this is achieved by drilling of additional exploration wells.

Drilling of additional exploration wells is restricted to periods before the conceptual choice is made. The wells are drilled in clusters of predetermined size, where a cluster may comprise one or several wells. Information received from the well(s) is assumed binary, and either indicates a low volume or a high volume. (Perfect information about the reservoir volume is only obtained through production.) The indication of a low volume corresponds to the well(s) not hitting oil, while indication of a high volume is obtained if the well(s) hits oil. The probability of receiving a given well information is conditional upon the true reservoir volume, and the information is used to update the operator’s probability distribution in a standard Bayesian manner.