Economic events will drive more complex use of Monte Carlo Simulation across the sector

Randy Heffernan, VP, Palisade Corporation

Ever since the global economic crisis began and oil prices crashed, the world economy has been on the brink of double-dip recession. Instability in key producing regions like Libya has led to extreme volatility in the price of oil. Managing oil and gas projects has become more challenging and riskier than ever before. Managing risk is even more crucial today, to prevent delays and costly over runs.

Traditionally, Monte Carlo Simulation and decision trees have been used to analyse the likelihood of a site or “play” having oil, and how much, before drilling. Now companies like Petrobras, the Brazilian oil producer and refinery operator, are using it for more complex analyses, such as analysing multiple plays or concessions (A concession is the right to drill in a location for a period of time. Plays or concessions may be shared joint ventures with other oil companies.)  Petrobras has implemented a corporate-wide protocol for evaluating the economic risks associated with potential investments. This integrated solution gives the company a host of benefits. When multiple sites and players are involved, these techniques can be used to optimise overall strategy. 

Another key example is the look at upstream projects as real options and the use of Monte Carlo Simulation to analyse the best course of action. When contemplating new projects, many options must be considered and valued, such as waiting to start, investing in additional wells, or even abandoning a project.

Using Monte Carlo Simulation for more complex analyses should be a priority for oil and gas companies, if they’re to manage the risks associated with projects successfully.

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