The expected value of the seismic is the chance the seismic would interpret channel multiplied by the expected value of the subsequent branch plus the chance the seismic would interpret no channel multiplied by the expected value of the subsequent branch. The reliability of the seismic is subject to many factors including the quality of its processing, the effort and appropriateness of the acquisition parameters to the specific geologic target, and also to the interpretive techniques being employed. Column three in Table 2 shows the calculation of the numerator of Bayes’ Theorem. Sensitivity analysis of the seismic reliability and cost can be performed with this method, which could determine the maximum amount that should be spent on seismic, or the minimum change in the probability of success that the seismic can afford while still enjoying an advantage in expected value. The seismic is thus more valuable in this example, mostly due to the fact that the poor well outcome is indeed quite economically damaging. These are the likelihood of each of the Ei events occurring. Interested in starting, or contributing to a conversation about an article or issue of the RECORDER? You assign gains and losses to the potential outcomes and set a probability of each happening. The event outcomes for drilling have been studied and are reasonably well known. Business or project decisions vary with situations, which in-turn are fraught with threats and opportunities. Deciding not to drill rather and lose $100,000 is a much better decision than to drill and lose $1,714,000. Table 2 shows the solution to Bayes’ theorem if B’ indicates there is no channel at the well location. Sensitivity analysis is essential to achieving sufficient understanding of a question so that the act of “high levelling” the problem becomes rational and reasonable. The value of -$150,000 includes the - $50,000 cost of the seismic and the - $100,000 operational penalty from deferring to complete a surface pad in order. We will use sensitivity analysis to mitigate the problem of committing to only one set of parameters. NPV = +$5,000,000. Seismic discriminates the quality of the well locations through amplitude versus offset analysis (AVO) identification of superior reservoir quality and fracability (Goodway et al, 2006, Close et al, 2012). Table 5 below shows the solution to Bayes’ theorem if B’’ indicates a superior well. NPV = -$4,500,000. In Chart 1, we see that we have several choices: first, at decision node F we choose to either gamble and drill using our original estimate of probabilities, or do we choose to purchase the seismic. Newendorp (1975) describes a general approach that may be used to estimate the value of any imperfect information prior the point of making a decision that has uncertainty. If we purchase the seismic, we come to chance node E where the seismic may yield an interpretation that the well location will encounter channel, or the interpretation may be that the well will miss the channel. This is no surprise; we should not invest in anything that lacks a value argument, otherwise it is charity. The information that we bring in (say geophysical data such as seismic) defines event B. please let us know by emailing: As a result, the expected value arising from the use of seismic is higher that the gamble approach through most of the graphed space. We then describe the three most common types of real options that firms face in practice and then explain how decision trees might be used to arrive at an approximation of the value of the real option that is embedded within a project. These joint probabilities sum to 0.26, which is the denominator of Bayes’ Theorem, and is the total probability that the seismic interpretation will suggest a channel will not be encountered. Even under conditions where the initial economic success of the wells is as high as 75% to 80%, and the seismic data only adds a small additional advantage, it can be strongly economic to buy and use the seismic data. The solution to Bayes’ theorem is also called the revised probabilities or revised risk estimates of each event given the interpretation. If we have the seismic, should we accept the interpreter’s advice? A decision is being contemplated as to drill a well into a welldefined, thick, and broad, Mannville channel system in West Central Alberta. The results showed seismic related net present value (NPV) differences on the order of a million dollars per well as measured by differences in reservoir bulk storage and their associated rates, estimated ultimate recoveries, and decline analysis. The decision analysis approach is often overlooked for many reasons. Column four in Table 2 shows the solution to Bayes’ theorem, and is thus each value in column three divided by the sum of column three. A decision tree helps you consider all the possible outcomes of a big decision by visualizing all the potential outcomes. This means that there is objective economic motivation to invest in better processing, acquisition, and the use of the most advantageous interpretive techniques. The value of the seismic is much higher than its expense. The expected NPV at node A, the choice to gamble, is simple. Risk has always been a short form for describing the probability of various desirable or undesirable outcomes, and in the resource play environment we have vastly reduced the probability of not encountering reservoir or hydrocarbons. The B’ seismic interpretation probabilities are simply interchanged with the B probabilities. So, what is the overall expected value of the seismic, and should we purchase it? The reliability of the information indicating event B is given as P(B|Ei). Bayes’ theorem is useful because it combines the reliability of the information with the original probabilities of each event. Again, we have the gamble scenario versus the seismic scenario. The meaning of risk in today’s world, is better expressed as the probability of a spectrum of results with different economic values. Let us first define the events and probabilities succinctly: E1 = event or state of nature 1 = the channel will not be present, E2 = event or state of nature 2 = the channel will be present. Seismic could be shot and processed for a cost that works out to be $50,000 per well location. Definition: Decision tree analysis is a powerful decision-making tool which initiates a structured nonparametric approach for problem-solving.It facilitates the evaluation and comparison of the various options and their results, as shown in a decision tree. We do not perform geophysics for intrinsic reasons; in business we have no interest in it as a thing in itself. The value of geophysical data may be estimated from observation, but only if we have knowledge of sufficiently similar decisions being made with and without the information, together with an accurate description of the economic differences in the results.

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