Appearing in Journal of Petroleum Science &

Engineering, 43 (2004), 183-199

Decision Analysis under Uncertainty for

Smart Well Deployment

B. Yetena,∗ , D. R. Brouwerb , L. J. Durlofskya,c , and K. Aziza

a Stanford University, Department of Petroleum Engineering
b Delft University of Technology, Department of Applied Earth Sciences
c ChevronTexaco Energy Technology Company
∗ now with ChevronTexaco Energy Technology Company

Abstract

Downhole inflow control devices allow for the flexible operation of nonconven-
tional wells. In this paper, a method for determining the optimal performance of
smart wells; i.e., wells containing downhole inflow control devices, is presented. The
method entails the use of a gradient based optimization technique in conjunction
with a reservoir simulator. The optimization accounts for uncertain geology as well
as the risk of failure of the control devices. A decision analysis approach is presented
to determine whether or not to deploy smart completions in light of these uncer-
tainties. The overall optimization technique is applied to several example problems
involving geological models with multiple geostatistical realizations and with differ-
ent reliability scenarios for the control devices. It is shown that there is significant
variation in the level of improvement attainable using inflow control devices and
that this improvement varies with both the valve reliability and the particular ge-
ological realization. Decision making techniques are used to quantify the benefits
obtained using optimized smart wells under different risk attitudes.

Key words: Optimization, smart wells, nonconventional wells, control,

uncertainty, reliability

1 Introduction

A smart (or intelligent) well is a nonconventional well with downhole instru-

mentation (sensors, valves and inflow control devices) installed on the produc-
tion tubing. Such wells allow for the continuous in-situ monitoring of fluid flow
rates and pressures and the periodic adjustment of downhole valves. Smart
well technology provides great flexibility in the operation of multilateral wells,

Preprint submitted to Elsevier Science 17 October 2003

as each branch of the well can be controlled independently. In the case of a
monobore well (such as a horizontal or deviated well), the downhole instru-
mentation essentially transforms the well into a multi-segment well, again with
the ability to control each segment independently.

The benefits of smart wells have been demonstrated in practical applications,

especially for multiple reservoirs where commingled production is the main
production strategy (Lucas et al., 2001; Jalali et al., 1998). In these opera-
tions, the control devices are commonly used in on/off mode (i.e., the branch
is either opened or closed to production), which may not be the optimum way
of operating these devices. The applicability of intelligent completions, how-
ever, is not confined to scenarios involving commingled production; potential
benefits for production from a single reservoir have also been demonstrated in
several studies (Valvatne et al., 2003; Jansen et al., 2002; Sinha et al., 2001;
Yeten and Jalali, 2001; Yu et al., 2000). Specifically, because smart wells can
be used to monitor and control flow rate and pressure, these completions can
be effective for controlling the coning or cusping of water and gas. With smart
completions, the objective might be to allocate the inflow rates for each branch
such that the objective function (cumulative oil, net present value of the well)
is maximized.

One approach for using smart well technology is to react to production prob-
lems (e.g., water coning) and then reset the instrumentation to mitigate them.
This is often referred to as a “reactive control strategy”. A better approach is
to use downhole inflow control devices in conjunction with a predictive reser-
voir model. This allows for the optimization of reservoir performance rather
than just the correction of problems that have already occurred. This “defen-
sive” (rather than reactive) strategy is the method considered here.

In this paper, we present a comprehensive approach for deciding whether or

not to deploy smart wells. The methodology includes an optimization proce-
dure which allows for the determination of the benefits that can be achieved
using downhole inflow control. A probabilistic model is introduced to account
for the possibility of hardware failure. By considering multiple geostatistical
realizations, the effects of geologic uncertainty are also included. The over-
all procedure is cast in a decision analysis framework to allow for systematic
decisions regarding smart well deployment.

A few authors have previously addressed the optimization of smart wells.

Brouwer et al. (2001) presented a static optimization methodology that max-
imized sweep in a waterflood study. They considered fully penetrating smart
horizontal injection and production wells. Their basic algorithm involved shut-
ting in the segments of the well with the highest productivity index and adding
the production from these segments to other well segments. This was shown
to provide a better sweep efficiency. Dolle et al. (2002) introduced a dynamic

2
optimization algorithm that applied optimal control theory. Using this ap-
proach they demonstrated improved sweep and recovery over their previous
method (Brouwer et al., 2001). Brouwer and Jansen (2002) investigated the
effects of smart completions with different well targets and constraints in a
water flooding project using optimal control theory. They found considerable
scope for accelerating production and increasing recovery for wells operating
with rate targets. Sudaryanto and Yortsos (2000) also applied optimal control
theory for the optimization of sweep efficiency. They optimized fluid injection
rates for two-dimensional problems with vertical wells.

Khargoria et al. (2002) studied the impact of valve placement, inflow config-
uration and mode of operation on production performance using a horizontal
well on a synthetic bottom water drive model. They considered both reactive
and defensive modes. They used simulated annealing and conjugate gradient
optimization algorithms to determine the optimum location and control set-
tings of the valves to maximize the cumulative oil production. In their work
the valve settings were not updated in time. The same optimum was achieved
with both of the methods.

Gai (2001) introduced an optimization method for multi-zone or multilateral

flow control completions. He used the inflow performance relationship and
developed valve performance relationships to optimize the valve settings. Gai
stated that, despite the substantial development of smart well hardware in
recent years, work addressing the optimal application of this technology has
lagged. Nyhavn et al. (2000) stressed similar issues and indicated that the
next objective for smart completions should be production optimization.

In order to arrive at a decision on the deployment of smart wells, one must

first quantify their benefits. The benefits of these wells can be determined
by optimizing their operation to maximize the net present value (NPV) or
recovery. These devices are not completely reliable and may fail to operate at
some time. This will of course reduce the expected benefits of smart devices.
Reaching on appropriate decision on the deployment of smart completions
requires the integration of geological and engineering uncertainty. We now
briefly consider some aspects of engineering uncertainty.

Veneruso et al. (2000) discussed the reliability of permanent downhole equip-

ment. They stated that the reliability targets set by industry for downhole
equipment were 90% probability of proper operation for 5 years for the mon-
itoring systems and a 90% probability of proper operation for 10 years for
actuators. They also indicated that actual reliability numbers for existing
downhole gauges were often lower, especially for gauges operating at high
temperatures. Based on past history they constructed survival and hazard
functions for permanent downhole gauges. Three distinct failure mechanisms
for downhole equipment were identified, with each occurring at a different

3
phase.

Failures at an early stage were attributed to installation, cable and mateable

connector related problems. In the medium term, constant failure rates were
observed, with failures ascribed to connections at the tree, tubing hanger, an-
nular safety valve or packer, and sometimes at the gauges. Late failures were
reported to be due to a short circuit at the gauge or at the connection. They
also found that the equipment reliability was greatly dependent on temper-
ature, with the expected life time of the gauges being significantly shorter
in high temperature environments. They also stated that, even though the
occurrence of a particular failure may be a random event, the failure modes
themselves are not random. In this paper a probabilistic failure model that
represents these three failure mechanisms is introduced. The model is then
incorporated into the overall optimization procedure.

This paper proceeds as follows. A gradient based optimization procedure for

the control of a smart multilateral well is presented. The algorithm accounts
for the detrimental effects of valve failures through use of a failure probability
model. The optimized simulation results are analyzed within a decision anal-
ysis framework, using a utility function that allows for different risk attitudes.
The algorithm is applied to several example cases where the uncertainty in
the geological description and valve reliability are considered. It is shown that
risk attitude can impact decisions in some cases, though in other cases the
decision regarding smart well deployment does not vary with risk attitude.

2 Methodology

The approach presented here takes advantage of the features available in a

commercial reservoir simulator, ECLIPSE (GeoQuest, 2001). This simulator
models wellbore flow via a fully implicit, strongly coupled well model in which
the wellbore is divided into segments (Holmes et al., 1998; GeoQuest, 2001).
This Multi-Segment Wells Option uses the drift flux model for the representa-
tion of multiphase flow in the wellbore, which enables the phases to flow with
different velocities in the well.

There are several ways of representing the opening or closing of downhole

inflow control devices using the multi-segment well model in ECLIPSE. A con-
venient way of modelling the control devices is to represent the corresponding
well segments as a sub-critical valve. This imposes an additional pressure
drop in the segment due to flow through a constriction with a specified cross-
sectional area. The simulator then calculates the total pressure drop (∆pt )
across the inflow control device through use of a homogeneous model of sub-
critical flow in a pipe containing a constriction. This pressure drop is given

4
by summing the frictional pressure losses and the pressure losses due to the
control device (GeoQuest, 2001):

∆pt = ∆pc + ∆pf , (1)

where the effect of the constriction, ∆pc , is calculated via

ρvc2
∆pc = Cu , (2)
2Cv2

and the pressure loss due to friction, ∆pf , is calculated by the standard ex-
pression for homogeneous flow through a pipe (GeoQuest, 2001):

L
∆pf = 2Cu f ρm vp2 . (3)
D

In the above equations ρm represents the density of the fluid mixture in the
segment, Cu = 2.159×10−4 is a unit conversion factor (all units are given in the
Nomenclature), Cv is a dimensionless valve coefficient, vc and vp are mixture
velocities (flow rate divided by area) through the choke and pipe, respectively,
f is the Fanning friction factor, and L and D represent the length and diameter
of the pipe segment. The valve setting (i.e., degree of opening) of the inflow
control device is specified in terms of the area of the constriction Ac . This
area enters Eq. 2 via its effect on vc ; i.e., vc = qc /Ac , where qc is the flow rate
through the constriction.

2.1 Optimization Algorithm

The nature of the problem suggests a gradient based optimization algorithm.

A valve can either be incrementally opened or incrementally closed, so there
are only two directions in which any valve setting can move. The gradient
information basically provides this direction. The current well control opti-
mization engine is built on a nonlinear conjugate gradient (CG) algorithm
adapted from Press et al. (1999). In the next section a brief description of
the nonlinear CG will be given. Further details of this algorithm can be found
elsewhere (Press et al., 1999; Gill et al., 1999; Shewuck, 1994).

5
Conjugate gradient methods can be used to find the minimum point of a
quadratic function. Nonlinear CG methods can be applied to minimize any
continuous function f (x) for which the gradient, f 0 , can be calculated. In a
nonlinear CG method, the residual, r, or the direction of steepest descent, is
set to the negative of the gradient (Shewuck, 1994):

³ ´
rk = −f 0 xk . (4)

In this and the following equations the subscript k indicates the iteration level;
k = 0 refers to the initial guess. The search directions, dk , are computed by
k
Gram-Schmidt ³ conjugation´ of the residuals. The value of the step size α that
k k k
minimizes f x + α d is found by ensuring that the gradient is orthogonal
to the search direction.

Below is an outline of the nonlinear CG algorithm used in this work (Shewuck,

1994):

d0 = r0 = −f 0 (x0 )
³ ´
Find αk that minimizes f xk + αk dk
xk+1 = xk + αk dk
³ ´
rk+1 = −f 0 xk+1 (5)
k+1 k+1 k+1 k
d =r +β d
where
( T
)
k+1 (rk+1 ) (rk+1 −rk )
β = max T ,0 .
(rk ) rk

The Gram-Schmidt constants, β k , are calculated in Eq. 5 using the Polak-

Ribiérie method. An alternate approach is to use the Fletcher-Reeves method
(Shewuck, 1994).

The algorithm is deemed to be converged when the norm of the residual falls
below a specified value, which is typically taken to be a small fraction of the
initial residual. The convergence criteria can thus be specified as:

° ° ° °
° k° ° °
°r ° < ε °r0 ° . (6)

6
where ε is the fractional convergence tolerance, here taken to be 0.01.

The optimization problem is defined as:

maximize f (x), (7)

0≤xi ≤1

where f is the objective function (e.g., the recovery factor or net present value),
x is the vector that holds the valve settings and xi is a component of x. These
valve settings vary continuously between 0 (valve fully closed) and 1 (valve
fully open) and are given by Ac /Amax , where Amax is the maximum constric-
tion area (valve fully open). The gradient vector, f 0 , is calculated numerically
using a forward finite difference approximation:

∂f f (x + h) − f (x)
f0 = = . (8)
∂x h

A step size, h, of 0.05 is used in this study. The f 0 computed by Eq. 8 can
sometimes be a very large positive or negative number. This might cause the
next proposed setting to be too large or too small or even negative, which
is of course unphysical. To avoid this situation the objective function is also
scaled between 0 and 1. If we specify the recovery factor as our objective
function there is no need for this scaling, as the recovery factor is already in
the range 0 ≤ f ≤ 1. When the valve settings approach the upper limit (i.e.,
xi → 1), we replace Eq. 8 with a backward difference approximation to avoid
the unphysical situation of xi + h > 1.

2.2 Implementation

The optimization algorithm is implemented such that the performance of the

reservoir for a particular set of valve settings can be determined via forward
simulations. This is accomplished by dividing the entire simulation period into
n optimization steps (these steps are distinct from the simulator time steps).
The valve settings for the first period (t = 0 to t = t1 ) are then optimized.
This optimization is performed such that the settings for this period will be the
optimum for the entire simulation. Once this optimization is completed, the
next period (t = t1 to t = t2 ) is optimized by restarting the simulation from
the end of the previous optimized step. This is repeated for each optimization
step. Using this approach the settings determined for the earlier steps will not
have detrimental effects at later times. For example, were one to optimize only
over the optimization step and not over the entire simulation period, one might
introduce a situation in which valve settings are optimal for t = 0 to t = t1

7
but severe water coning appears for t = t1 to t = t2 . The approach described
here avoids this limitation. Note that the control devices are assumed to have
infinite resolution in their settings.

This optimization procedure can be specified as follows:

(1) Divide the simulation period into n time periods at which the settings
will be updated to optimize the objective function.
(2) For each period i, optimize the device settings such that they maximize
or minimize the objective function for the remaining simulation period
(i.e., solve Eq. 7).
(3) Restart the simulation from the end of the previous period.
(4) Repeat steps 2 and 3 until the entire simulation period is covered.

The overall process is depicted in Fig. 1. In this figure each color represents an
optimized valve setting for the specific time period. The circles on this figure
represent the restart points which coincide with the end of an optimization
period. The optimization time periods can be determined based on the ac-
tual downhole hardware (i.e., it may not be possible to update valve settings
very frequently). The optimization process clearly becomes more computation-
ally expensive as more periods are considered. For the cases presented below,
O(100) simulations were required for the optimizations. The exact number of
simulations is quite case specific, and could be reduced through the use of
proxy functions such as artificial neural networks and response surfaces.

Several variants of this procedure could also be implemented. The method

cannot be expected to achieve the global maximum or minimum unless mul-
tiple passes of the algorithm are introduced. This is because settings at the
early periods are optimized under the assumption that they will persist for
the remainder of the simulation, which is not the case. This is probably not
a significant concern in practice, however, as the valve settings at early times
have the most impact on oil recovery. This in turn suggests that the optimal
settings at early times are not substantially affected by changes at later times.
There may be cases, however, for which modifications to the above algorithm
will be required.

The main advantage of this approach is that an existing commercial simulator

can be used for the flow calculations. The construction and solution of an
adjoint system (Dolle et al., 2002; Brouwer and Jansen, 2002) is thus avoided.
In cases with many valves to be optimized, however, the adjoint approach will
be significantly less computationally intensive.

8
3 Probabilistic Model for Valve Reliability

Downhole valves are relatively new in the industry, and only limited informa-
tion is available on their reliability. Valve failure may, however, greatly affect
the performance of the smart completions. The severity of this effect will de-
pend on the time and the type of valve failure. The particular failure modes
are expected to be related to how the hardware was manufactured.

One failure mode is that the valve sticks in its current setting, which may be
caused by failure in the valve itself, or by the loss of control from the surface.
This type of valve failure will be referred to as failure type 1. Some valves are
manufactured according to the failure-open type, meaning that upon failure,
the valve fully opens automatically. In the remainder of this paper this will be
referred to as failure type 2. Other valves are configured to fully close upon
failure, referred to as failure type 3. In the coming sections the cumulative
distribution function (cdf) for assessing device reliability will be presented.

3.1 The “Bathtub” Curve

The probability for a valve to fail is related to its reliability, which can be
expected to change over time. In addition, over the lifetime of a component,
the most likely failure mechanism can also be expected to change. Initially the
highest likelihood of failure for a component may be of the infant mortality
type. In this stage failure is most likely caused by inadequate testing of the
equipment, or due to damage caused during installation. As time progresses
this failure mechanism becomes less likely to occur. Hence the failure likelihood
decreases with time after the infant mortality period. The failure likelihood in
this stage is rather low and approximately constant and is deemed to be due
to random errors. After this period of relatively high reliability the component
begins to age and may fail as a result. The expected trend at this stage is that
the failure likelihood increases with time.

The different failure mechanisms as functions of time are represented in the

“bathtub” probability density function (pdf), as shown in Fig. 2. The period
0 < t < t1 shows a decreasing failure likelihood in time, corresponding to
an infant mortality type of failure mechanism. In the period t1 < t < t2
the failure likelihood is approximately constant, corresponding to the random
failure mechanism. The last period t > t2 corresponds to the aging failure
mechanism. The exact shape of the pdf varies with the type of component,
the environment in which it is installed, and the task it is performing. In this
figure failure likelihood decreases in the late period because failure has already
occurred.

9
3.2 The Weibull Distribution in Life Testing

A distribution function that is very convenient for representing the life distri-
bution of components where the failure rate varies over time is the Weibull
distribution. The Weibull failure cumulative distribution function is given by:

( µ ¶β )
t
F (t) = 1 − exp − , (9)
α

where β is the shape parameter and α is the scale parameter. Assuming the
valve is operating at a time t1 , the probability that it is still operating at a
later time t2 is given by:

1 − F (t2 )
p12 = . (10)
1 − F (t1 )

The probability of failure by the later time t2 (assuming operation at t1 ) is

simply 1 − p12 .

The shape parameter β allows the distribution to assume a variety of shapes,

and therefore defines the failure mechanism. Specifically, β < 1 implies an
infant mortality failure mechanism; i.e., a failure likelihood that decreases
with time. A value of β = 1 represents a random failure mechanism and thus
a constant failure likelihood. The range 1 < β < 4 implies early wear out,
while β > 4 implies old age and rapid wear out. For all β > 1 the failure
likelihood increases with time.

The scale parameter α (α > 0) stretches or compresses the pdf. Values of α > 1
act to stretch the pdf. Higher values of α give broader distributions, with the
peak occurring at later times. The peak time is the most likely time of failure.
Values of α < 1 compress the pdf, with the distribution approaching a spike
as α → 0. More detailed information about the Weibull distribution can be
found in Abernathy (2000).

As discussed above, the dominant failure mechanism is expected to change

over time. Thus, the shape parameter β should vary in time. This could be
realized by dividing the total operation time into a number of stages that each
has its own characteristic failure mechanism with a corresponding value of β.
However, since a change from one dominant failure mechanism to another is
not likely to occur abruptly, β would be expected to change gradually over
time. This is accomplished here by choosing a β that increases with time,
according to the following linear relationship:

10
 β (t) = c + zt, (11)

where c and z are prescribed constants.

Inserting β = c + zt into Eq. 9 provides the cdf defining the valve failure prob-
abilities. The pdf can then be obtained by differentiating Eq. 9 with respect
to t, with β now a function of time as given by Eq. 11.

3.3 Optimization Procedure with Valve Reliability

The overall optimization procedure is essentially as described in Section 2.2,

with extra steps introduced for each optimization period to account for pos-
sible valve failures. The procedure is as follows.

At the start of each optimization step, a random number R is drawn for each
of the valves. This number is compared to the failure probability pf of the
valve. All failure states (types 1, 2 and 3) are considered equally likely to
occur. Therefore the probability of failure at a certain time is divided into
three intervals that represent the failure mode (i.e., if the random number is
0 ≤ R < 31 pf , the valve fails according to type 1, if 31 pf ≤ R < 23 pf , the failure
is of type 2 and if 23 pf ≤ R ≤ pf , the failure is of type 3). If R is larger than
pf , the valve remains intact.

The gradients are then calculated for all valves that are still intact, and the re-
maining production interval is optimized by determining the optimum settings
for these valves.

4 Decision Analysis under Uncertainty

In this section, the methodology that will be used to assess the effect of un-
certainties on decisions will be discussed.

An individual may encode his preferences in a utility function u (·) defined

on the “prizes” of any “deal”. Utility is a measure of the relative satisfaction
over the possible ranges of outcomes. It basically represents preferences. The
utility function has the following important properties:

• The expected utility is defined as follows:

11
 N
X
hu (x)i = u (xi ) · pi . (12)
i=1

where hu (x)i is the expected utility of all N outcomes of xi that occur with
a probability of pi .
• If alternative L1 is preferred to alternative L2 then u (L1 ) > u (L2 ).

A typical utility function can be represented via an exponential function as

shown below (McNamee and Celona, 1990):

u (x) = a + berx , (13)

where r is called the risk attitude. For r > 0 the decision maker is risk prone,
for r < 0 the decision maker is risk averse, and for r = 0 the decision maker
is risk neutral.

A convenient form of Eq. 13 can be obtained by rescaling x such that 0 ≤ x ≤ 1

1 1
and choosing u (0) = 0 and u (1) = 1, which leads to a = 1−e r and b = − 1−er .

Substituting this a and b into Eq. 13:

1 − erx
u (x) = . (14)
1 − er

From Eq. 14, it can be shown that u (x) → x as r → 0 (i.e., u (x) = x for a
risk neutral decision maker).

Typical utility curves for different risk attitudes are shown in Fig. 3. The
shape of the curve determines whether the decision maker is risk neutral, risk
averse or risk prone. A risk neutral decision maker has a linear utility function
which is equivalent to basing decisions purely on expected value. A risk averse
decision maker has utility function with u00 (x) < 0, which shows the avoidance
of uncertainty even if it might have the possibility of greater gain. The risk
prone decision maker has u00 (x) > 0 which represents a decision maker who
is willing to take some risk for the chance of greater gain. Once the decision
maker provides the risk attitude coefficient and x is defined, u (x) can be
used to determine the decision maker’s preferences; i.e., the alternative that
maximizes the expected value of the utility function.

The preferences represented by the utility function are unchanged if the func-
tion is subjected to a linear transformation of the form:

12
 u∗ (x) = a + bu (x) , b > 0. (15)

In addition the utility values are invertible (see Eq. 14), so preferences can
be transformed back to the original data units. The inverse of the expected
utility is called certain equivalent, CE. “Inverse” in this context, represented
as u−1 , means the value of x that provides a particular value of u. In this
study the decisions will be based on the CE values of the alternatives rather
than on the utilities, though this does not change the decisions themselves.

5 Applications

In this section several applications involving uncertainties in the geological

description and in the reliability of the smart completion devices are presented.

The optimization procedure is applied to several problems involving two-phase

flow (oil and water) in a highly heterogeneous North Sea type fluvial reservoir.
The simulation model is three-dimensional, of dimensions 5000 × 5000 × 50
ft3 , and contains an aquifer. The model parameters are given in Table 1.
Five unconditional realizations of the reservoir description, consisting of two
facies, channel sand and mudstone, were generated using the fluvsim soft-
ware (Deutsch and Tran, 2002). The permeability within each of the facies
was populated independently and unconditionally by sequential Gaussian sim-
ulation (Deutsch and Journel, 1998). The channel sand permeabilities have a
mean of 1497 md with a standard deviation of 585 md, and the mudstone per-
meabilities have a mean of 5 md with a standard deviation of 1.5 md. These
statistics are based on all the realizations. The channel orientation, length and
sinuosity are the same for all realizations, though the actual channel locations
vary between realizations. The vertical to horizontal permeability was taken
to be 0.1. An analytical aquifer was introduced to maintain pressure support
from the bottom of the reservoir.

A herringbone-pattern multilateral well with four laterals, located to intersect

the channels, was introduced into the models. In order to minimize the in-
terference between branches, the junctions were located equidistant along the
main bore with the laterals alternating in direction, as shown in Fig. 4. The
background in this figure illustrates the permeability distribution, with light
colors indicating high permeability and darker colors low permeability. The
solid white circle in the figure indicates the heel of the well; the solid shaded
circles on the main bore depict the locations of the valves that control each
lateral. The well was completed at the top layer of the model, 45 ft above

13
the water-oil contact. The main bore was not perforated. Each lateral was
approximately 2150 ft long. The well location, completion architecture and
instrumentation were the same for each of the realizations.

Initial production was specified at a total liquid rate of 5.0 MSTB/d. There
was a constraint on water production; specifically, the well was shut in if the
water cut exceeded 85%. A minimum bottomhole pressure of 1500 psi was
imposed for lift considerations, although this BHP was not reached during
any of the simulations due to the presence of the aquifer. The simulations
proceeded for 2960 days (∼ 8 years), with valve settings updated at every 185
days (16 optimization steps). The optimizations were based on maximization
of oil recovery.

5.1 Case 1: Assessment of Geological Uncertainty

In the first case, the five simulation models, each having a different realization
of the geological description, were run with no instrumentation on the well
(base case). Then four control devices on the tubing of the main bore, close
to each of the junctions, were introduced, so that each of the laterals could
be controlled independently. Following this, the optimization algorithm was
applied to each geological realization to maximize the oil recovery for that
particular realization.

Table 2 displays the cumulative oil production attained at the end of the sim-
ulations for the base and the optimized cases. The variation in cumulative
production between realizations, for both the base and controlled cases, is due
to the high degree of geological variation between the realizations. These vari-
ations strongly impact the degree of connectivity of the well to the channels
and to the aquifer. The percentage increase in cumulative oil production due
to optimized downhole inflow control (last column) varies from 4.7% to 51.0%.
The average increase over the five realizations is 24.7% with a standard de-
viation of 17%. This demonstrates the considerable level of improvement and
the variation in oil production that can be achieved through the use of smart
wells.

The higher average in cumulative oil production and the lower standard de-
viation for the optimized instrumented wells suggest that they can partly
compensate for the adverse effects of the geological features, i.e., the well per-
formance becomes somewhat less dependent on geology. In this respect smart
completions can be considered to be a type of “insurance policy” against ge-
ological uncertainty.

Table 2 clearly shows how the uncertainty around the reservoir description
could affect the decision on whether or not to instrument a well (it should be

14
noted that in the case considered here, however, the geostatistical realizations
were not conditioned to any reservoir data and no attempt was made to assess
the number of realizations required for reliable statistics). For the realizations
with low additional recovery the instrumentation might not be economical.
For other realizations, however, significant resources might be lost by not
deploying the control devices.

In a practical setting, results such as those shown in Table 2 might lead one
to proceed in several ways. One approach is to consider a number of relevant
solution variables and their probability distributions and to introduce a utility
function along with a risk attitude coefficient. This would then allow for the
application of a decision analysis in the presence of uncertainty. Alternatively,
one might attempt to better characterize the reservoir in order to narrow the
geological uncertainty. This would require an assessment of the value of the
additional geological information.

5.1.1 Deployment Decision under Geological Uncertainty

Since the optimizations were based on oil recovery, an NPV analysis with zero
discount rate and zero water handling cost was used. The NPV calculated
with this approach, which also accounts for the cost of the smart completions,
is consistent with the objective function of the optimization problem (i.e.,
maximization of oil recovery).

The NPV values calculated for each realization for the base and instrumented
cases and the percentage increase attained by instrumentation over the base
cases are given in Table 3. An oil price of $18 and a valve cost of $500,000
(per valve) were used. The same type of NPV analysis will be used for the
cases discussed in the next sections.

In order to proceed with the decision analysis, the exponential utility function
given in Eq. 14 was used. The decision was based on choosing the alternative
with the larger CE, where CE = hu (x)i−1 . Applying Eq. 12, x represents
scaled NPV (i.e., between 0 and 1), N = 5 is the number of geological realiza-
tions, which are deemed to be equiprobable, giving pi = 0.2. A sketch of the
overall analysis for a risk neutral decision maker (r = 0) is shown in Fig. 5,
using the data from Table 3. In this figure the circles represent the uncer-
tainty nodes and the rectangles show the decision nodes. The branches after
the uncertainty nodes correspond to the geological realizations. The decision
node represents the two alternatives, L1 , not deploying and L2 , deploying the
devices. After calculating the utility of the scaled NPV values for each geo-
logical realization (using Eq. 14 with r = 0), Eq. 12 is used to calculate the
expected utility of each alternative, L1 and L2 . The calculations show that
hu (L1 )i = 0.453 and hu (L2 )i = 0.796. Therefore, alternative L2 is preferred

15
over L1 , indicating that the devices should be deployed.

Similar calculations to those shown in Fig. 5 were performed for different

risk attitude coefficients. The results are given in Table 4. Results in this
table show that the devices should be deployed. This is due to the fact that
the deployment of the devices gave an improvement for all cases considered.
Note that in this table, instead of expected utilities (preferences), the certain
equivalent values, CE = hu (x)i−1 , are presented. These CE values are the
expectations of the decision maker, not the actual dollar values that will be
achieved in reality.

From this table there are some important conclusions that can be drawn.
The highly risk averse decision maker (r = −10) has a lower CE and the
highly risk prone decision maker (r = 10) has a higher CE than the others
in both the base and instrumented cases. In terms of increase in CE (fourth
column of Table 4), the highly risk averse decision maker expects to have more
benefit than the others. This is because, with optimized smart completions,
the standard deviation is smaller and the mean is larger relative to the base
case. The highly risk averse decision maker therefore expects to gain more,
since less was expected in the base case.

5.2 Case 2: Assessment of Uncertainty Around the Reliability of Control

Devices

In this section the reservoir model is deemed to be deterministic. Realization

#3 was selected from the previous case as the geological description. The way
in which the risk of failure of the control devices affects the overall performance
and decisions will be demonstrated.

Since detailed reliability data on inflow control devices are not readily avail-
able, three reliability scenarios were considered. In scenario I the most likely
failure time of the valves was considered to be low with the valves expected to
fail after only a few years. In scenario II the most likely failure time was higher
but the valves were still expected to fail before the end of the production time
interval. In scenario III the most likely failure time was close to the total pro-
duction time, and there existed a possibility of valves remaining intact over
the entire production time interval. For each scenario the failure mechanism
as a function of time was expected to be the same, hence the same values of
c and z (which define β) were used (though α was varied).

For parameter c, in Eq. 11, a value of 0.99 was chosen, indicating that the
failure type was initially infant mortality. For parameter z a value of 0.5 was
selected. Consequently β linearly increased from 0.99 (at t = 0) to 4.99 (at
t = 8 years), thereby including the infant mortality, the random error, and

16
the early and late wear stages. The total production period was divided into
16 intervals of 6 months each, which corresponds to the optimization steps
(i.e., the time at which valve settings were computed).

A different expected life time for each scenario was obtained by selecting a
different value for the scale parameter α. For scenarios I, II, and III, α values
of 3, 5, and 7 were chosen respectively. Fig. 6 shows the failure probability
density functions (pdfs) for these scenarios. In Fig. 6 the probability of failure
is zero beyond 5.5 years in scenario I (α = 3), indicating that all valves will fail
before this time. This indicates a maximum lifetime of 5.5 years for the valves
in scenario I. Similarly, a maximum lifetime of about 7.5 years is observed for
the valves in scenario II (α = 5). In scenario III (α = 7), however, the pdf is
still larger than zero at 8 years, indicating that valves can remain intact over
the entire simulation period.

For each scenario, 40 separate simulation models were run (and optimized).
Valve failure time and type, determined probabilistically as described above,
was different for each of these models. We refer to these runs as “failure re-
alizations”. At each optimization step, the settings of the intact valves were
optimized to maximize oil recovery. The distribution of the valve failure times
for scenario II is shown in Fig. 7. The similarity between Fig. 6 (α = 5) and 7
suggests that the number of failure realizations was sufficient to reproduce the
pdf for the valve failure times.

Fig. 8 shows the valve states as a function of time for 4 of the 40 failure
realizations for scenario II. For run1 all valves remained intact for 2.5 years
after the start of production. Valves 1 and 3 were closed at 4.5 and 2.5 years
respectively due to failures of type 3. Valve 2 became stuck at 4 years due to
a failure of type 1, while valve 4 opened completely at 5 years due to a failure
of type 2.

Fig. 9 shows the differences in cumulative oil production (relative to the unin-
strumented base case) using the smart completions for all three scenarios. For
scenario I the average increase in cumulative production for the 40 runs was
5.9%, for scenario II it was 10.8% and for scenario III, 15.5%. The figure clearly
shows the impact of reliability on the added value of the smart completions.
With increasing reliability (e.g., scenario III), the additional cumulative oil
distribution moves increasingly towards positive values.

The results indicate that apart from the time of failure, the type of failure
is also important. Fig. 10 displays the difference in cumulative oil production
(relative to the base case) versus the time of first valve failure. The figure
shows that failure of type I (valve stuck in existing position) often did not
have a strong negative impact on the cumulative oil production, even when
the valve failed at an early stage. The reason for this is that the valve was likely

17
to have a near-optimal setting before it failed. The strongest negative impact
was found for valves failing according to type III (valve being fully closed).
The earlier this type of failure occurred, the lower the resulting cumulative
production. The impact of failure type II was found to be between the other
two failure modes.

5.2.1 Deployment Decision with Uncertain Device Reliability

To make decisions on deployment of devices with uncertain reliability, the

same procedure is applied as in Case 1. In this case the decision node again
has two branches: deploy or not deploy the devices. The branch corresponding
to deploy has an uncertainty node with 40 branches (each corresponding to
a particular failure realization, which are deemed to be equiprobable). The
branch corresponding to not deploy does not have any uncertainty nodes,
since there are no devices installed in the base case. The same decision tree
construction and analysis were performed for each of the three scenarios.

The results are presented in Table 5. It is evident from this table that a highly
risk averse decision maker (r = −10) will not deploy the devices. This is the
case because, in an extreme risk averse situation, the focus is more on avoiding
the potential negative impact (cost and the loss of production due to failure)
of deploying the devices. In less risk averse situations, by contrast, the focus
tends to be more on the benefits that deployment of the devices may bring.

5.3 Case 3: Assessment of Uncertainty in both Geology and Reliability

In this section, both types of uncertainties considered in the previous sections

are coupled to assess the overall uncertainty in a conceptual smart well de-
ployment project. The most likely failure time of the devices is fixed to be 5
years (scenario II in the previous case). A total of 40 failure realizations and
5 geological realizations are considered. This case therefore required 200 opti-
mizations with each optimization run typically requiring 80 to 100 simulation
runs (for a total of approximately 18,000 simulations).

The results are presented in Table 6. In this table, the third column provides
the average cumulative oil production of 40 failure realizations (in the instru-
mented case) for each geological realization. The fourth column shows the
average percentage increase over the base case. Comparing Tables 2 and 6, a
reduction in the optimized cumulative productions is evident in the latter set
of runs. This is due to the adverse effects of device failures.

18
5.3.1 Deployment Decision with Overall Uncertainty

In this case the decision tree is more complex than in the other cases. Again
there are two branches emanating from the decision node: do not deploy and
deploy. The do not deploy has an uncertainty node with 5 branches, each cor-
responding to equiprobable realizations of the geology. The deploy node again
has an uncertainty node with 5 branches corresponding to geological realiza-
tions, but now each branch emanating from this node has another uncertainty
node corresponding to the reliability of the devices. As in Case 2, these nodes
have 40 branches, each corresponding to a particular valve failure realization.
A simplified decision tree for this case is shown in Fig. 11.

Table 7 shows the decisions based on the CE values of the alternatives when
all the uncertainties are considered. From this table it is clear that regardless of
the risk attitude coefficient, the decision should be made in favor of deploying
the devices. When the base case and instrumented case certain equivalents
are compared for each decision maker, the more risk averse decision makers
generally expect to gain more than the others. The reasoning is the same in
this case as was observed in Case 1.

If the geological description was deemed to be known, as in Case 2, then the

decisions may change. Table 8 shows this for each geological realization, con-
sidering the only uncertainty to be the reliability of the devices. It is apparent
from this table that, for realizations #2 and 4, most decision makers prefer
not to deploy the devices. Tables 7 and 8 suggest that the geological uncer-
tainty is more important than the uncertainty in the reliability of the devices.
Note that all the decision makers prefer to deploy the devices in the presence
of geological and reliability uncertainty (see Table 7), but when the geology
is deemed to be deterministic, decisions may change from deploy to do not
deploy.

6 Conclusions

A general method for the optimization of smart wells with downhole inflow
control devices was presented and applied to various examples. The impor-
tant effects of uncertainty in reservoir description and equipment reliability
were considered. The benefits of these devices were analyzed within a decision
making framework.

The following conclusions can be drawn from this work:

• The higher average in cumulative oil production (or net present value) and
the lower standard deviation for the optimized instrumented wells (Cases

19
 1 and 3) suggest that downhole control can compensate to some extent
for geological uncertainty, even when the possibility of equipment failure is
included. This demonstrates the insurance value of smart completions.
• The impact of equipment reliability was related to both the timing and
type of failure. Generally, the earlier the valves failed the larger the negative
impact on the cumulative oil production. The impact of failure type 1 (valve
stuck in current position) was often not that severe since the valve may
already have been in an optimized position. The negative impact was largest
for failure type 3 (valve fully closed upon failure).
• In the case when both the geology and the device reliability were uncertain
(Case 3), it was seen that all of the decision makers considered here would
choose to deploy the devices. Some of these decisions would change, how-
ever, if geological uncertainty was eliminated; i.e., if the geology was deemed
to be deterministic. This suggests that the impact of geological uncertainty
dominates that of engineering uncertainty, at least for the scenarios consid-
ered here.

Acknowledgments

We are grateful for financial support from the Industrial Affiliates of the Stan-
ford University Project on the Productivity and Injectivity of Horizontal Wells
(SUPRI-HW) and from the U.S. Department of Energy (under contract no.
DE-AC26-99BC15213). We thank Prof. J. Caers (Stanford University) for use-
ful discussions regarding the Weibull distribution. Portions of this work ap-
peared earlier in preprint form in SPE paper 79031, presented at the 2002
SPE International Thermal Operations and Heavy Oil Symposium and In-
ternational Horizontal Well Technology Conference held in Calgary, Alberta,
Canada, November 4-7.

Nomenclature

A cross-sectional area perpendicular to flow, ft2

B formation volume factor, volume/volume
c rock compressibility, psi−1 , initial value for β
Cu unit conversion factor, 2.159 × 10−4 (field units)
Cv valve flow coefficient, dimensionless
d search direction
f objective function, data units, or Fanning friction factor
F failure cumulative distribution function
h step size in derivative evaluation

20
k permeability, md
L alternative
n number of optimization steps
p pressure, psi, or probability
q flow rate, ft3 /s
r residual in CG formulation
R random number, 0 ≤ R ≤ 1
t time, days or years
v velocity, ft/s
V volume, STB or MSCF
x scaled valve constriction areas, dimensionless
z slope of change of β, years−1
α step size, scale parameter in Weibull distribution, years
β Gram-Schmidt constant, shape parameter in Weibull distribution
ε fractional convergence tolerance
γ specific gravity, dimensionless
φ porosity, fraction
µ viscosity, cp
ρ density, lbm/ft3
σ standard deviation, data units

Subscripts

c constriction
f friction, or failure
I scenario I
II scenario II
III scenario III
m mixture
or residual oil
r random
ro relative to oil
rw relative to water
t total
wc connate water
v valve

21
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23
Table 1
Simulation Model Properties
drainage area 5000 × 5000 ft2
oil thickness 50 ft
φ 0.25
crock 3.0×10−5 psi−1
kro 1.00 at Swc = 0.15
krw 0.57 at Sor = 0.15
γ at 14.7 psi
oil 0.85
water 1.0
µ, cp
oil 4.0 at 14.7 psi
water 0.30 at 4000 psi
B, V /V
oil 1.0 at 14.7 psi
water 1.02 at 4000 psi

Table 2
Case 1 - Comparison of Cumulative Oil Production
Geological Uncontrolled Instrumented Additional
Realization Base Case Case Recovery
# (MMSTB) (MMSTB) %
1 3.34 5.04 51.0
2 5.38 5.63 4.7
3 4.61 5.52 19.7
4 5.07 6.07 19.7
5 4.23 5.43 28.1
Average 4.53 5.54 24.7
Std. Dev. 0.79 0.37 17.0

24
Table 3
Case 1 - Comparison of NPV
Geological Uncontrolled Instrumented Incremental
Realization Base Case Case NPV
# (MM$) (MM$) %
1 60.1 88.7 47.7
2 96.8 99.3 2.6
3 83.0 97.4 17.3
4 91.3 107.3 17.6
5 76.2 95.7 25.5
Average 81.5 97.7 22.1
Std. Dev. 14.3 6.7 16.5

Table 4
Case 1 - Decision on Deploying Devices under Geological Uncertainty
Risk Attitude CE, MM$ CE, MM$ Increase in
Coefficient Base Case Inst. Case in CE, % Decision
-10 67.5 94.4 39.8 Deploy
-6 71.2 95.6 34.1 Deploy
-2 77.8 96.9 24.6 Deploy
0 81.5 97.7 19.9 Deploy
2 84.6 98.5 16.4 Deploy
6 88.5 100.0 12.9 Deploy
10 90.7 101.3 11.7 Deploy

25
Table 5
Case 2 - Decision on Deploying Devices with Uncertain Reliability
Risk Attitude
Coefficient Scenario I Scenario II Scenario III
-10 Do not deploy Do not deploy Do not deploy
-6 Do not deploy Deploy Deploy
-2 Deploy Deploy Deploy
0 Deploy Deploy Deploy
2 Deploy Deploy Deploy
6 Deploy Deploy Deploy
10 Deploy Deploy Deploy

Table 6
Case 3 - Comparison of Cumulative Oil Production
Geological Uncontrolled Instrumented Additional
Realization Base Case Case Recovery
# (MMSTB) (MMSTB) %
1 3.34 4.48 34.3
2 5.38 5.31 -1.2
3 4.61 5.11 10.8
4 5.07 5.61 10.7
5 4.23 4.97 17.4
Average 4.53 5.10 14.4
Std. Dev. 0.79 0.42 13.0

26
Table 7
Case 3 - Decision on Deploying Devices with Uncertain Geology and Reliability
Risk Attitude CE, MM$ CE, MM$ Increase in
Coefficient Base Case Inst. Case CE, % Decision
-10 67.2 78.1 16.3 Deploy
-6 69.9 83.0 18.7 Deploy
-2 76.4 87.8 14.9 Deploy
0 81.5 89.5 9.8 Deploy
2 86.0 90.6 5.4 Deploy
6 90.3 92.2 2.0 Deploy
10 91.7 93.1 1.6 Deploy

Table 8
Case 3 - Decision on Deploying Devices with Uncertain Reliability but Known Ge-
ology
Risk Attitude Geological Realization
Coefficient #1 #2 #3 #4 #5
-10 Deploy Do not deploy Do not deploy Do not deploy Deploy
-6 Deploy Do not deploy Deploy Do not deploy Deploy
-2 Deploy Do not deploy Deploy Do not deploy Deploy
0 Deploy Do not deploy Deploy Do not deploy Deploy
2 Deploy Do not deploy Deploy Do not deploy Deploy
6 Deploy Do not deploy Deploy Do not deploy Deploy
10 Deploy Do not deploy Deploy Deploy Deploy

27
 Fig. 1. Optimization of Valve Settings for Each Time Step
Failure pdf

Infant Random failure Early wear out Rapid wear out

Mortality
Time

Fig. 2. Probability Density Function of a Typical Bathtub Curve

0.9

0.8

0.7

0.6
u(x)

0.5

0.4

0.3

0.2
Risk Neutral
0.1 Risk Averse
Risk Prone
0
0 0.2 0.4 0.6 0.8 1
x

Fig. 3. Exponential Utility Function for Different Risk Attitudes

28
 10,000 md

1 md

Fig. 4. Top View of the Multilateral Well Configuration

Fig. 5. Decision Analysis for a Risk Neutral Decision Maker

α=3
α=5
0.30
α=7

0.25

0.20
pdf

0.15

0.10

0.05

0
0 1 2 3 4 5 6 7 8 9
Time, years

Fig. 6. Probability Density Functions of Failure for all the Scenarios

29
 25

20

Occurences
15

10

0
0 1 2 3 4 5 6 7 8
Failure time, years

Fig. 7. Valve Failure Time Distribution in Scenario II (α = 5)

run1 run2

1 1
Valve #

2 2
3 3
4 4
run3 run4

1 1
Valve #

2 2
3 3
4 4
1 2 3 4 5 6 7 8
Time, years
no fail
fail stuck
fail open
fail closed

Fig. 8. Valve States as Function of Time in Scenario II

30
 Occur.
20
10
0
−30 −25 −20 −15 −10 −5 0 5 10 15 20 25
Scenario I: Increase in cum oil, %

Occur.

20
10
0
−30 −25 −20 −15 −10 −5 0 5 10 15 20 25
Scenario II: Increase in cum oil, %
Occur.

20
10
0
−30 −25 −20 −15 −10 −5 0 5 10 15 20 25
Scenario III: Increase in cum oil, %

Fig. 9. Increase in Recovery for the Three Scenarios

All valves combined

20

15
Diff. in cum. oil production, %

10

−5

−10

−15 fail. stuck (type 1)

fail. open (type 2)
fail. closed (type 3)
−20
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5
Time, years

Fig. 10. Relation between the First Time of Failure and the Difference in Cumulative
Oil Production (Results for Scenario II)

31
Fig. 11. Simplified Version of the Decision Tree Used in Case 3

32