In this paper methodologies for reservoir characterization during underbalanced drilling is presented. In these methodologies we are using a transient wellflow model coupled to a transient reservoir model, and use estimation techniques to estimate reservoir properties. Our focus is to estimate the permeability and reservoir pressure along the well, using measured data usually available while drilling. The measured data are outlet rates, pump pressure and downhole pressure. The liquid injection and gas injection rates are used as input to the model. The methodologies are applied to synthetic cases.