Integrating Price Path Uncertainty Into Optimal Extraction Path Analysis of Unconventional Liquids Rich Reservoirs

Abstract

Abstract The acquisition of unconventional assets has become viable under current technical and economical conditions. While producing the conventional resources, utilizing the reserve replacement potential offered by the unconventional reservoirs has brought up optimal extraction path considerations. Optimal extraction path analyses mainly focus on the timing of incorporating unconventional production within a company’s portfolio. This paper establishes a decision making framework that takes into account that different price scenarios can unfold with differing probabilities of occurrence and that switching from conventional to unconventional production comes at a cost. The model is based on an integrated discounted cash flow and optimization formulation to find the differing parameters necessary to populate a decision tree framework. A series of differing price paths are considered for a company with exogenously assigned probabilities of occurrence and an optimal path analysis is conducted under different assumptions regarding its risk propensity. A sensitivity analysis is also conducted on the probabilities of different price scenarios to better understand the risk the company faces in making production decisions. Using the framework introduced in this paper, a company should be able to make a more informed decision that considers price path uncertainty and risk preferences in the timing of the switch from conventional to unconventional production.