In the petroleum industry, the decision to develop newly discovered hydrocarbon resources must be made under conditions of uncertainty; i.e., with less than perfect information available. However, both the degree of uncertainty and the economic consequences which are associated with such decisions can, and do, vary widely. Of particular interest are frontier areas where either a premature or an overdue decision can jeopardize the viability of a multibillion dollar project.

Although uncertainty can always be reduced by simply buying more information--additional delineation wells, 3-D seismic surveys, extended well tests, detailed design studies, etc., there must be a point at which the cost of additional information exceeds its benefit. This paper examines the problem of determining the point at which the development decision should be made; it specifically considers the following two principal sources of uncertainty:

  1. The estimated distribution of the hydrocarbon reserves.

  2. The cost of development--assumed to be related directly to the projected distribution of the development period.

A realistic procedure, based on the concept of the optimal development plan, is presented and discussed; criteria related to the time for decision making and to the decision itself are established; and, the real value of information is determined. Finally, to demonstrate the use of the suggested approach, a comprehensive example--typical of a frontier area--is included.

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