Society of Petroleum Engineers 6200 North Central Expressway Dallas, Texas 75206

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American Institute of Mining, Metallurgical, and Petroleum Engineers, Inc.

Large scale projects for the development of new oil and gas fields, whether in the U.S. or foreign, are often financed by commercial bank lending. Particularly when such financing is Particularly when such financing is done on a "project" basis on appraisal of the property to be developed is required for a lender to determine the future value and debt repayment ability of the property. Such appraisals are often performed prior to development with data from a few exploratory wells. These appraisals can have results that vary greatly depending on the methods of data application.

This paper presents a system of engineering appraisal which combines statistical methods of data application with commonly used reservoir engineering procedures. Data distributions on procedures. Data distributions on such componants of the reservoir and production appraisal as porosity, production appraisal as porosity, permeability, and gas-oil ratio are permeability, and gas-oil ratio are used to identify ranges of potential appraisal results. Statistical methods of frequency distribution and standard deviation are used to obtain a distribution of final appraisal results. The system then uses a variation of expected value theory to impose a risk factor on the appraisal results to determine the expected value of future reserves and revenues from the project. This appraisal procedure allows the lender to assess risk exposure and to structure the project financing accordingly.

Introduction

Over the past 30 years oil and gas exploration and development has moved continuously from the relatively inexpensive and safe continental areas to more remote and challenging areas. A very rapid expansion of large scale development has occurred offshore and in previously undeveloped areas. The primary example is the North Sea but offshore California, Alaska, Arctic Canada and the Amazon Basin are also very active. In the North Sea alone more than 20 new fields have been discovered and are in various stages of development. The cost of development of these new areas is enormous. The large number of extremely high cost projects undertaken by all companies has resulted in massive bank debt financing.

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