This paper describes an approach for simulating and appropriately valuing complex E&P projects containing multiple prospects. The approach uses a Monte Carlo simulation model, which is described, that simulates a play containing multiple prospects. The play evaluated can consist of pure exploration prospects, or may contain a mixture of discovered reserve opportunities (DRO's) and exploration prospects. Resource (reserve) size distributions, dependent geologic prospect risks, risk tolerance, stand-alone commercial threshold sizes, and tie-back thresholds are some of the key drivers of the play simulation.
The simulation generates expected commercial reserve levels and commercial risks for each prospect included in the play, as well as an overall project commercial reserve distribution and risk level. In addition, and more importantly, discrete development scenarios for high (P90), mid (P50), and low (P10) reserve cases can be generated. These development scenarios can then be used to determine a valuation range for the prospects.
The value of this approach is that it provides a consistent methodology to generate a range of discrete development scenarios that span the reasonable range of project success - case expectations. Development plans for those scenarios can then be applied and the scenarios can be deterministically evaluated to determine the range of the project's economic value. This hybrid approach of a stochastic play model combined with deterministic economic evaluations avoids some of the common pitfall of most pure stochastic or pure deterministic approaches.
Methodology is also described for logically grouping discrete prospects into "super-prospects" for the purpose of evaluating projects that contain an unwieldy number of small prospects.