Cost Estimation & Control

Probabilistic Estimate (Risk)

Navigating Uncertainty: The Power of Probabilistic Estimates in Oil & Gas

In the volatile world of oil and gas, project success hinges on accurate cost estimations. But traditional deterministic estimates, relying on a single point value, often fail to capture the inherent uncertainties that plague every stage of a project. Enter probabilistic estimates, a powerful tool that embraces uncertainty and provides a more realistic picture of potential outcomes.

Understanding the Uncertainty:

Probabilistic estimates acknowledge that real-world projects are riddled with uncertainties. Factors like fluctuating oil prices, geological complexities, unexpected technical challenges, and even unpredictable weather events can significantly impact costs. Instead of assuming a single, fixed value, a probabilistic approach assigns probabilities to a range of possible values for each project component.

Building a Range of Possibilities:

Imagine a project requiring a specific piece of equipment. A deterministic estimate might assume a single price, say $1 million. But a probabilistic estimate would consider various scenarios:

  • Best-Case Scenario: The equipment could be procured at $900,000 with a 20% probability.
  • Most Likely Scenario: The price might be $1.1 million with a 60% probability.
  • Worst-Case Scenario: There could be unforeseen delays and cost overruns, pushing the price to $1.3 million with a 20% probability.

The Power of Aggregation:

By applying this approach to each component of a project, a probabilistic estimate ultimately generates a distribution of possible total project costs. This distribution, often presented as a curve, reveals the likelihood of various cost outcomes, offering valuable insights for decision-making.

Benefits of a Probabilistic Approach:

  • Realistic Cost Estimates: Probabilistic estimates provide a more comprehensive view of potential costs, capturing both optimistic and pessimistic scenarios.
  • Risk Identification and Mitigation: The analysis highlights areas of high uncertainty, allowing for targeted risk mitigation strategies.
  • Informed Decision-Making: By understanding the distribution of possible outcomes, stakeholders can make more informed decisions regarding project feasibility, budgeting, and risk tolerance.
  • Improved Communication: Probabilistic estimates enable clearer communication of uncertainties to investors, management, and other stakeholders.

Implementing Probabilistic Estimates:

The success of probabilistic estimates depends on rigorous data analysis, expert judgement, and robust modeling techniques. Techniques like Monte Carlo simulations are often used to generate these distributions, factoring in correlations between different project components.

Conclusion:

In the unpredictable world of oil and gas, probabilistic estimates offer a valuable tool for navigating uncertainty. By embracing the inherent risks and complexities, they empower stakeholders to make informed decisions, better manage risk, and ultimately increase the chances of project success.

Test Your Knowledge

Quiz: Navigating Uncertainty: Probabilistic Estimates in Oil & Gas

Instructions: Choose the best answer for each question.

1. What is the main advantage of probabilistic estimates over deterministic estimates in the oil and gas industry?

a) Probabilistic estimates are faster and easier to calculate. b) Probabilistic estimates provide a single, fixed value for project costs. c) Probabilistic estimates acknowledge and quantify project uncertainties. d) Probabilistic estimates are only used for large-scale projects.

Answer

c) Probabilistic estimates acknowledge and quantify project uncertainties.

2. Which of the following is NOT a factor that contributes to uncertainty in oil and gas projects?

a) Fluctuating oil prices b) Geological complexities c) Predictable weather patterns d) Unexpected technical challenges

Answer

c) Predictable weather patterns

3. What does a probabilistic estimate typically present as a result?

a) A single, most likely cost value b) A range of possible cost outcomes with associated probabilities c) A detailed list of potential risks and their impacts d) A guaranteed project completion date

Answer

b) A range of possible cost outcomes with associated probabilities

4. What is a key benefit of using probabilistic estimates in oil and gas projects?

a) Eliminates all risks associated with the project b) Guarantees project success c) Facilitates more informed decision-making regarding project feasibility and risk tolerance d) Reduces the need for expert judgement and data analysis

Answer

c) Facilitates more informed decision-making regarding project feasibility and risk tolerance

5. Which of the following is a commonly used technique for generating probabilistic estimates?

a) Linear Regression b) Monte Carlo Simulation c) Time Series Analysis d) Data Mining

Answer

b) Monte Carlo Simulation

Exercise:

Scenario: You are involved in a project to develop an offshore oil platform. One key component is a specialized drilling rig, for which the deterministic estimate suggests a cost of $5 million.

Task:

  1. Identify at least three factors that could contribute to uncertainty in the cost of the drilling rig.
  2. For each factor, create a hypothetical range of possible values with corresponding probabilities, following the structure provided in the text (Best-case, Most likely, Worst-case).

Example:

Factor: Manufacturing delays

Possible Values and Probabilities:

  • Best-case: No delays, price remains at $5 million (Probability: 40%)
  • Most likely: Minor delays, price increases to $5.5 million (Probability: 50%)
  • Worst-case: Significant delays, price increases to $6 million (Probability: 10%)

Exercice Correction:

Exercice Correction

Factors and Possible Values/Probabilities:

1. Market Fluctuations:

  • Best-case: Demand for drilling rigs is low, price drops to $4.5 million (Probability: 20%)
  • Most likely: Stable market, price remains at $5 million (Probability: 60%)
  • Worst-case: High demand, price increases to $5.8 million (Probability: 20%)

2. Technological Advancements:

  • Best-case: New technology reduces cost, price drops to $4.2 million (Probability: 15%)
  • Most likely: No significant technological changes, price remains at $5 million (Probability: 70%)
  • Worst-case: Unexpected complications with new technology, price increases to $5.5 million (Probability: 15%)

3. Unforeseen Delays:

  • Best-case: No delays, price remains at $5 million (Probability: 40%)
  • Most likely: Minor delays, price increases to $5.2 million (Probability: 50%)
  • Worst-case: Major delays and unforeseen complications, price increases to $6 million (Probability: 10%)

Books

  • Risk Management and Decision Making in the Oil and Gas Industry: By John M. Campbell, this book provides a comprehensive overview of risk management techniques, including probabilistic methods, within the oil and gas sector.
  • Risk Analysis and Management for Petroleum Engineers: Edited by E.E. Roshan and S.A. Khan, this book focuses on the application of risk analysis and management tools, including probabilistic estimates, in various aspects of oil and gas engineering.
  • Cost Engineering: Principles and Practice: By R.S. Leavenworth, this classic text explores cost estimation techniques, including probabilistic methods, across various industries, including oil and gas.

Articles

  • Probabilistic Risk Assessment for Oil and Gas Facilities: By J.S. Evans, this article provides a detailed guide on the application of probabilistic risk assessment (PRA) techniques in oil and gas operations.
  • Using Probabilistic Methods for Improved Cost Estimation in Oil and Gas Projects: By M.J. Smith and A.B. Jones, this article focuses on the practical application of probabilistic cost estimation methods in the oil and gas industry.
  • The Benefits of Using Probabilistic Estimates for Oil and Gas Projects: By P.R. Taylor, this article highlights the advantages of using probabilistic estimates for decision making, risk management, and communication in oil and gas projects.

Online Resources

  • Society of Petroleum Engineers (SPE): This professional organization offers a wealth of resources on risk management, probabilistic methods, and other relevant topics for the oil and gas industry.
  • American Petroleum Institute (API): API provides standards, guidelines, and resources on various aspects of oil and gas operations, including risk assessment and management.
  • Risk Management Institute (RMI): This institute offers training and resources on various risk management techniques, including probabilistic methods.

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