Production Forecasting: Optimistic and Overconfident—Over and Over Again

Abstract

Summary The oil and gas industry uses production forecasts to make decisions, which can be as mundane as whether to change the choke setting on a well, or as significant as whether to develop a field. These forecasts yield cash flow predictions and value-and-decision metrics such as net present value and internal rate of return. In this paper, probabilistic production forecasts made at the time of the development final investment decisions (FIDs) are compared with actual production after FIDs, to assess whether the forecasts are optimistic, overconfident, neither, or both. Although biases in time-and-cost estimates in the exploration and production (E&P) industry are well documented, probabilistic production forecasts have yet to be the focus of a comprehensive, public study. The main obstacle is that production forecasts for E&P development projects are not publicly available, even though they have long been collected by the Norwegian Petroleum Directorate (NPD), a Norwegian government agency. The NPD's guidelines specify that at the time of FID, the operators should report the forecasted annual mean and P10/90 percentiles for the projected life of the field. We arranged to access the NPD database in order to statistically compare annual production forecasts given at the time of FID for 56 fields in the 1995 to 2017 period, with actual annual production from the same fields. This work constitutes the first public study of the quality of probabilistic production forecasts. The main conclusions are that production forecasts that are being used at the FID for E&P development projects are both optimistic and overconfident, leading to poor decisions.1 1 The conclusions based on the analysis presented in this paper are limited to the set of fields from the NCS. However, other authors have demonstrated the optimism bias in production forecasts from fields around the world (Nandurdikar and Wallace 2011; Nandurdikar and Kirkham 2012).