Applying Decision Trees to Improve Decision Quality in Unconventional Resource Development

Abstract

Decision trees have been used for many years in conventional oil and gas plays to help managers better understand risk and expected value for a project. Although industry has rapidly shifted over the past decade to developing unconventional resources, application of decision trees to these plays has lagged behind. When building decision trees for unconventional plays, it is often unclear to evaluators how to build the tree, namely, how to estimate the probability of meeting a given commercial threshold, as well as the production profiles and costs to use for each branch of the tree. This paper presents a workflow that can be used to build a decision tree for an unconventional play in the appraisal phase of development, given ranges of uncertainty in production profiles and drilling and completion costs. In applying this workflow, managers will better understand both the drivers of uncertainty in expected value and how they can influence it via appraisal program design and setting commercial thresholds. An example from a North American unconventional play is used as an example to illustrate the steps of the workflow.