Journal of Emerging Trends in Engineering and Applied Sciences (JETEAS) 3(4) 594-600 (ISSN: 2141-7016)

594


Application of Decision Theory in Assessing Marginal Oilfield
Risks: Niger Delta Hub Example

Alaneme, Charles Ezemonye and Igboanugo, Anthony Clement

Department of Production Engineering
University of Benin, Benin City, Nigeria.
Corresponding Author: Alaneme, Charles Ezemonye
___________________________________________________________________________
Abstract
Decision theory valuation methodology has been identified as an effective tool in the analysis and management
of risks for decision making in marginal oilfield exploitation. Numerous conventional methods in the employ of
most international oil companies seem an aberration in marginal oilfield operation due to the uniqueness of the
risks and the high cost of implementation. This short coming has resulted in the inability to optimally unlock
the economic potentials of marginal oilfields that has remained untapped to replenish fast declining oilfields on
account of their low economies of scale. A decision theory approach was successfully deployed in theoretically
analyzing decision alternatives with Isiekenesi Oilfield, one of 251 remotely located marginal oilfields in the
Nigeria Niger Delta. The study yielded corresponding payoff values for different reserve expectations of low,
medium, and high cases in barrels of crude oil. Despite its limitations in not aptly defining the risks in crisp
numbers, it successfully predicted the risk ratios of fundamental decision alternatives guided by basic
assumptions on state of nature. This approach provides a cost effective first-pass appraisal mechanism needful
for decision making process open to investment capitalists engaged in marginal oilfield exploitation.
__________________________________________________________________________________________
Keywords: marginal oilfield, reserves, risks, decision theory, Isiekenesi, Niger Delta.
__________________________________________________________________________________________
INTRODUCTION
Current risks assessment and management practices
by International Oil Companies (IOCs) have not been
very effective in marginal oilfields operation due to
the small size and remoteness of the oilfields, which
in most cases, are very far from existing processing
facilities coupled with the complexities of the
operation among others. Whereas IOCs operate
many oilfields to which they could afford to spread or
absorb the risks, local operators or venture capitalists
are constrained to just one or few marginal oilfields.
In the Nigerias Niger Delta for instance, circa 251
identified marginal oilfields are operated by nearly
equal number of indigenous companies who could
pass as small scale oilfield operators. This caliber of
operators lack basic technological know how and
managerial skills essential for handling the
complexities off marginal oilfields exploitation.
Marginal oilfields show great potential to
substantially contribute to the national economic
fortune of a producing country and could at the same
time ruin investors, if the associated risks are not
properly identified and managed. Further, marginal
oilfields contribute significantly to the national oil
reserve and in so facto deserve due attention.
Unfortunately, establishing risk management process
and database similar to IOCs, require many years of
built up experience and deployment of discipline
professionals, which can be quite strenuous and
expensive. This proposed approach takes into
cognizance feasible alternative courses of action in
conjunction with the prevailing state of nature and in
doing this; appropriate statistical techniques are
employed as decision support in arriving at the right
course of action.

There has been considerable interest in the
development and application of models to risk
management. Use of Simulation in risk analysis is
common in the risk analysis literature. Some
representative works on risk management using
Simulation approach include Chapman (1983),
Vinnen (1983), Cooper, MaccDonald, and Chapman
(1985), Pugh (1986), and Hall (1986). Following
these seminal research in the 1980s, further
application of Monte Carlo appeared in the 1990s.
The works Higgins (1993), Kostetsky (1994),
Savvides (1994) as well as Van Groenendaal and
Kleijnen (1997) are typical. Interest in Monte Carlo
simulation application to risk management has been
sustained in recent contemporary period. Coelho, et
al. (2005) compared Monte Carlo simulation with
Neural Network techniques and observed that the two
approaches complement each other. Further Chinbat
and Takakuwa (2009) focused on the development of
a simulation method for managing risk in Mongolian
mining project.

Besides Simulation technique, a variety of
approaches had also appeared in the risk management
literature. Thus in an effort to further establish the
use of risk analysis and, moreover, widen the scope
Journal of Emerging Trends in Engineering and Applied Sciences (JETEAS) 3 (4): 594-600
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Journal of Emerging Trends in Engineering and Applied Sciences (JETEAS) 3(4) 594-600 (ISSN: 2141-7016)
595

of applicable model, McCray, et al. (2002) as well as
Trumper and Virine (2011) introduced the use of
Event Chain. These studies demonstrated that the
method is quantitative and also mitigates cognitive
and motivational biases inherent in the project risk
analysis. Again, heuristic method of making
judgment about risk under uncertainty has been
studied by Tversky and Kahneman (1974). The
authors noted that though the approach is highly
economical and effective but it leads to systematic
and predictable errors. Also, Kaiser (2010) offers a
lively modeling of inventory of assets committed to
marginal oilfield production and sketched a
perspective of the producing assets.

In particular, the studies Schuyler (2001) and
Flyvbjerg (2006) provide interesting treatments of
risk analysis of projects using decision theory. In
addition, the book Rose (2012) provides detailed
treatment on risk assessment and the economic
implications for explorationists, managers, and
oilfield investors. Yet, a novel approach to risk
management known as unknown unknown is
presented by Raydugui (2011). The study noted that
people risk identification requires thinking outside
the box. Also, Bastos and Barton (2004) applied
Portfolio Theory that is based on Probabilistic
methodology. This was applied to Brazilian
electrical system involving development of stand
alone hydropower station. Last, Kraft (1982)
discussed risk in policy research and noted that risk
analysis is a veritable tool for managing risks in
projects. Again, works; Ward and Chapman (1991),
Harbaugh, et al. (1995), Undram and Takakuwa
(2009), and Andersen and Mostue (2011) emphasized
the need for the use of risk analysis in managing risks
in projects.

In sum, then, the foregoing sample literature review
provides palpable supportive evidence to the fact that
very little study appears to have been documented in
regards to application of Decision Theory to risk
management in marginal oilfields. This paper
therefore seeks to breach this frontier. Thus, the aim
of this paper is to apply Decision Theory in analyzing
risks inherent in the marginal oilfields located in the
Nigeria Niger Delta.

METHODS
This analytical and case study research design is
based on data obtained from three exploratory wells
drilled in Isiekenesi, a marginal oilfield located in the
Nigeria flank of Niger Delta. More specifically, the
data relates to wells drilled in the early 1910s with a
2-D seismic survey acquired sixty years later in the
early 70s. The field is a partially appraised, non-
concessionary onshore acreage located approximately
63 and 85 Kilometers North East of Izombe and
Egbema fields respectively in the Niger Delta.
Figure 1 shows the Oil Mining Lease (OML) map of
the Niger Delta and Benue Basin with relative
location of the Isiekenesi Field.


I si eke nesi
Acreage

Figure 1: Location Map of Nigeria Oil Mining Leases

The first well was drilled to a depth of 8,400 feet
(2,560 meters) and encountered 271 feet (87 meters)
of net oil in four sands. Also, Figure 2 shows the
cross-sectional map of the only three exploratory
wells. Snowball, non-random sampling technique
was followed.
NW SE
T. D.
L P.
10 8 0 0ss
1 08 0 0 ss
OW C 1 09 2 2ss
I SHI I - A3 I SHI I - A1 I HSI I -A2
ISHII A3.000P x-sect i on

Figure 2: Cross-sectional Map

The estimated expected reserves were taken from
preliminary evaluations conducted at the early stage.
Further, a 20-year production forecast for three case
scenarios; low case, medium case, and high case
representing proved, probable, and possible reserves
were estimated based on data from the three
exploratory wells. Again, another data obtained from
the oilfield relate to the initial estimated reserves and
are shown in Table 1.

Journal of Emerging Trends in Engineering and Applied Sciences (JETEAS) 3(4) 594-600 (ISSN: 2141-7016)
596

Table1: Reserve Expectation Scenarios
S/N Sensitivity Case STOIIP
(MMSTB)
Reserves
(MMSTB)
1 P90 25.3 10.1
2 P50 36.9 14.2
3 P10 53.5 22.6

For simplicity, we considered these three alternatives
open to prospective venture capitalists for operating a
marginal oilfield:
i) Direct Labour (Direct Execution)
ii) Partnership (Equity Sharing)
iii) Outsourcing (with 10% returns)

Expected Value Method (EVM)
This theoretical approach enables the analyst to
determine the following:
i) Expected Value E(x) of the reservoir
under uncertainty
ii) The associated risk in the management
of the reservoir uncertainties.

Let x be a random discrete variable known as the
pay-off matrix. Consider a probability or density
function
( ) . , ( ) 1
K
i i
f x p f x
=
= =

, then
( )
2
2
1
( ) . ( ),
, ( ) (1)
K
i
E x x f x and
Variance Risk x f x

=
= =
= =

Thus, the higher the variance, the higher the
associated risk.
From (1):
2 2 2
2 2
2 2
2 2
( 2 ) ( )
( ) 2 ( ) ( )
( ) 2 . .1
( ) (2)
x x f x
x f x xf x f x
x f x
x f x

= +
= +
= +
=

For this oilfield, the state of nature in Table 2 has
been estimated as follows:

Table 2: Assumed State of Nature
S/N Alternative Investment
Capital
Income
(Reserve)
1 Direct Labour 100% 100%
2 Partnership 60% 60%
3 Outsourcing 0% 10%

S/N Sensitivity Reserve
Expectation
Historical
Probability
1 P90 Low 0.25
2 P50 Medium 0.70
3 P10 High 0.2




Case Analysis
The confidence limits are
0
0
0
/ 2
/ 2
/ 2
/ 2
, ;
90%, 1.67
50%, 0.67
10%, 0.12
, 3
Confidence Limits y Z and fromstatistical Table
n
For Z Z
For Z Z
For Z Z
Number of wells n

=
= =
= =
= =
=
(3)
And, for spatial contiguity of the wells, being that
they are in the same region, the standard deviation
among the well voluminosity should be
25% =

A) Proved Case (90% Confidence level), K=1,
where n is number of exploratory wells.
State of nature = 25/75.
90%
1.67
for confidence level
UCL y
n

= +
(4)
0.25(10.1)
10.1 1.67
3
12.535MMSTB
= +
=

1.67 LCL y
n

=
(5)



State of Nature
Decision
Alternatives
Operating Factor S1 (0.25) S2
(0.75)
1 1.0 12.535 7.666
2 0.6
(Equity share
factor)
7.521 4.600
3 0.1
(Expected Royalty
Factor)
1.254 0.767


(6)
12.535 7.666
0.25
7.521 4.600
0.75
1.253 0.7666
| |
| |
|
=
|
|
\ .
|
\ .

12.535 0.25 7.666 0.75
7.521 0.25 4.600 0.75
1.253 0.75 0.7666 0.75
+ | |
|
= +
|
|
+
\ .

1
8.883
( ) 5.330
0.888
k
E x
=
| |
|
=
|
|
\ .

2 2 2
( ) Risk x f x = =

(7)
2 2
8.883 12.535 7.666
0.25
5.330 7.521 4.600
0.75
0.888 1.253 0.767
| | | |
| |
| |
=
|
| |
\ .
| |
\ . \ .


0.25(10.1)
10.1 1.67
3
7.666MMSTB
=
=
( ) . ( ) E x x f x = =

Journal of Emerging Trends in Engineering and Applied Sciences (JETEAS) 3(4) 594-600 (ISSN: 2141-7016)
597







4.444
1.600
0.045
| |
|
=
|
|
\ .

99.648
0.045 35.883
1
| |
|
=
|
|
\ .

100
36
1
| |
|
~
|
|
\ .

B) Probable Case (50% Confidence level),
K=2, where n is number of exploratory
wells. State of nature = 70/30
0
UCL y Z
n

= +
(8)
0.25(14.2)
14.2 0.12
3
15.573MMSTB
= +
=

0
LCL y Z
n

=
(9)
0.25(14.2)
14.2 0.12
3
12.827MMSTB
=
=


State of Nature
Decision
Alternatives
Operating
Factor
S1 (0.70) S2 (0.30)
1 1.0 15.573 12.827
2 0.6
Equity share
factor
9.344 7.696
3 0.1
Expected Royalty
Factor
1.557 1.283

2
( ) . ( )
k
E x x f x
=
=

(10)
15.573 12.827
0.7
9.344 7.696
0.3
1.557 1.283
| |
| | |
=
|
|
\ . |
\ .

(15.573 0.7) (12.827 0.3)
(9.344 0.7) (7.696 0.3)
(1.557 0.7) (1.283 0.3)
+ | |
|
= +
|
|
+
\ .

1
2
3
14.749
8.850
1.489
d
d
d
| | | |
| |
=
| |
| |
\ . \ .

2 2 2
, ( ) Hence the risk x f x =

(11)
2 2
14.749 15.573 12.827
0.7
8.850 9.344 7.696
0.3
1.489 1.557 1.283
| | | |
| | | |
=
|
| |
\ . | |
\ . \ .

219.122 217.533
78.885 78.323
2.235 2.214
| | | |
| |
=
| |
| |
\ . \ .

1.589
0.562
0.021
| |
|
=
|
|
\ .

2
75
, ( ) 0.021 27
1
Risk
| |
|
~
|
|
\ .

C) Possible Case (10% Confidence level),
K=3, where n is number of exploratory
wells. State of nature = 20/80
0
UCL y Z
n

= +
(12)
0.25(22.6)
22.6 0.12
3
= +

22.992MMSTB =

0
LCL y Z
n

=
(13)
0.25(22.6)
22.6 0.12
3
=

22.208MMSTB =


State of Nature
Decision
Alternatives
Operating
Factor
S1 (0.20) S2 (0.80)
1 1.0 22.992 22.208
2 0.6
Equity share
factor
13.795 13.325
3 0.1
Expected
Royalty Factor
2.299 2.221
3
( ) . ( )
k
E x x f x
=
=

(14)
22.992 22.208
0.2
13.795 13.325
0.8
2.299 2.221
| |
| |
|
=
|
|
\ . |
\ .

(22.992 0.2) (22.208 0.8)
(13.795 0.2) (13.325 0.8)
(2.299 0.2) (2.221 0.8)
+ | |
|
= +
|
|
+
\ .

1
2
3
22.365
13.419
2.237
d
d
d
| | | |
| |
=
| |
| |
\ . \ .

2 2 2
, ( ) Hence the risk x f x =

(15)
2 2
22.365 22.992 22.208
0.2
13.419 13.795 13.325
0.8
2.2366 2.299 2.221
| | | |
| | | |
=
|
| |
\ . | |
\ . \ .

500.282 500.193
180.105 180.070
5.0033 5.0024
| | | |
| |
=
| |
| |
\ . \ .
0.089
0.035
0.001
| |
|
=
|
|
\ .

2
89
, ( ) 0.001 35
1
Risk
| |
|
~
|
|
\ .

Assumptions:
1. Three decision alternatives were considered in this
study namely:
a. direct in-house execution by Venture Capitalist
using own resources
b. partnership with other operators through equity
participation
c. direct or complete outsourcing and with expected
returns through royalty
2. Sixty/forty equity sharing between the investor
and participating partners is assumed
3. A royalty of 10% is assumed to be the return for
outright lease or full outsourcing of the oilfield
78.913 (157.126 0.25) (58.768 0.75)
28.411 (56.565 0.25) (21.160 0.75)
0.7898 (1.571 0.25) (0.588 0.75)
+ | | | |
| |
= +
| |
| |
+
\ . \ .

Journal of Emerging Trends in Engineering and Applied Sciences (JETEAS) 3(4) 594-600 (ISSN: 2141-7016)
598

4. on account of the spatial contiguity of the three oil
wells voluminosity, a fair assumption of 25%
variability standard deviation, that is, = 25% is
assumed
5. State of nature: A fair probability of achieving the
projected expected reserve cases are assumed as
follows:
a. 25% for Proved Case
b. 70% for the Probable Case
c. 10% for the Possible Case
6. Number of wells, n = 3, based on the number of
sampled exploratory wells.

RESULTS
The results of this study are presented in the
following sequence:
3.1 Resistivity log
3.2 Projected cross-sectional map
3.3 20-year estimated production schedule
3.4 Results of statistical computations of risks
associated with three decision options
The foregoing outline is taken seriatim.

Resistivity log Result
Figure 3 presents the reservoir resistivity log showing
the thick accumulation of hydrocarbon distribution
with a three layer yield.

Figure 3: Ishii-3 Resistivity Log

Projected Cross-Sectional Map
Figure 4.2 provides the cross-sectional map of the
three exploratory wells indicating areas of continuity.
I S H I I A 3 0 0 0 N
O W C = 9 8 8 7 f t s s , N o . o f W e l l p e n e t r a t i o n s = 3
I S H I I

Figure 4.2: Cross-sectional Map

The map provides a relative location of the
exploratory wells drilled presently and provides the
contiguity pattern in terms of the oil-water contacts
for the reservoirs at 9887 feet of subsurface.

Twenty Year Production Schedule
Figure 4.3 shows the profiles of the estimated 20-year
exploratory production forecast for the three expected
cases based on 2-D seismic data.
Low Case
Expectation
Medium
Case
Expectation
High Case
Expectation
0
500
1000
1500
2000
2500
3000
3500
4000
4500
1 3 5 7 9 11 13 15 17 19 21
V
o
l
u
m
e

(
M
S
T
B
)
Production Year
Figure 4.3: Oil Production Forecast

The plots represented the three possible scenarios of
low, medium, and high case probabilities.
Expectedly, the plot approximates to a normal
distribution over the 20-year period considered with a
peak duration lasting more than five years.

Results of Statistical Computations
Proved Case Scenario
This presents the low case expectation with highest
level of confidence. The expected pay-off in millions
of barrels for the three decision alternatives is as
follows:
1
2
3
8.883
5.330
0.888
d
d
d
| | | |
| |
=
| |
| |
\ . \ .

While, the associated relative risk is expressed as:
2
100
( ) 0.045 36
1
Risk
| |
|
~
|
|
\ .


Journal of Emerging Trends in Engineering and Applied Sciences (JETEAS) 3(4) 594-600 (ISSN: 2141-7016)
599

Implying that, the ratio of risks associated with the
three decision alternatives: direct execution;
partnership; outsourcing is 100:36:1. This
quantitative risk analysis is an operators guide to
action.

Probable Case Scenario
Again, this presents the medium case expectation
with average level of confidence. The expected pay-
off in millions of barrels for the three decision
alternatives is as follows:
1
2
3
14.749
8.850
1.489
d
d
d
| | | |
| |
=
| |
| |
\ . \ .
MSTB
And the relative associated risk is given by:
2
75
, ( ) 0.021 27
1
Risk
| |
|
~
|
|
\ .

Which shows a reduced ratio from the previous
Proved case scenario, thus, for probable case, the risk
ratio is estimated to be 75:27:1.

Possible Case Scenario
This presents the highest case expectation, however,
with the lowest level of confidence. In this category,
the expected pay-off in millions of barrels for the
three decision alternatives is expressed as:
1
2
3
22.365
13.419
2.237
d
d
d
| | | |
| |
=
| |
| |
\ . \ .
MSTB.
And, the associated risk is given by:
2
89
, ( ) 0.001 35
1
Risk
| |
|
~
|
|
\ .

In this version, the risk proportion is 89:35:1;
showing a significant variation from the previous
reserve expectation scenarios.

DISCUSSION
Increasingly, interest in marginal oilfields is rapidly
emerging owing mainly to the economic benefits.
Thus, oil producing countries concerned about the
fast depleting reserves without commensurate new
discoveries, are now striving to harness the huge
potentials from marginal oilfields which hitherto had
been neglected. Despite this interest, the exploitation
of these marginal oilfields has remained nightmarish
due to numerous risks and uncertainties associated
with the exploitation as expounded earlier.
Apparently, extrapolating the cost of conventional
practices by IOCs to managing marginal oilfield risks
has not been 100% effective due to several reasons.
First, IOCs could absorb or spread some of these
risks among their portfolios which other local
operators or venture capitalists might not be disposed
to handle. Second, the practical approach might be
too expensive for the local operators. The approach
in question is an accumulation of experience over a
long period which is not readily available to the
venture capitalists. Hence, a less costly theoretical
risk assessment method becomes a veritable tool
which this study has proposed.

Evidently, the approach adopted in this study,
although a statistical evaluation, but in some way, is a
ballpark of simulation methodology in the sense that
three different decision alternatives were brought into
perspective and analyzed based on certain stated
assumptions. The payoffs and the associated risks
were weighed up in order to guide the process of
taking well informed decisions on investment
alternatives.

Objectively, this study has successfully unearthed
quantitatively, the relative risks associated with likely
decision alternatives when faced with varied expected
reserve scenarios under uncertain states of nature.

CONCLUSION
Despite limited field data obtained from the marginal
oilfield, the study has been successful in using
decision tool methodology to provide quantitative
insight into the nature and distribution of risks
inherent in the marginal oilfield under study. Sure
enough, this outcome of the study has demonstrated
that a quantitatively guided decision could be reached
with sparse data which will not be easy with
conventional approach. All the same, by extending
the spectrum or bandwidth of the stated state of
nature, a sensitivity analysis could be called into play
in order to achieve optimization.

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