Data Science and Engineering Analytics Technical Section

Introduction:
In the realm of oil and gas project management, the evaluation of costs is a critical aspect of generating Authorization for Expenditure (AFE) documents. Traditionally, deterministic methods have been employed to estimate costs based on fixed parameters. However, probabilistic methodologies offer a more nuanced approach, considering uncertainties and variability inherent in complex projects. In this discussion, we explore the comparison between deterministic and probabilistic methods in cost analysis for AFE generation.

Deterministic Methods:
Deterministic methods involve estimating project costs based on fixed inputs and assumptions. This approach relies on historical data, expert judgment, and predefined parameters to calculate a single-point estimate of costs. While deterministic methods provide a straightforward and relatively quick assessment of project expenses, they may overlook uncertainties and fail to account for variability in factors such as resource availability, market conditions, and technical risks.

Probabilistic Methods:
Probabilistic methodologies, on the other hand, take a more comprehensive approach to cost analysis by incorporating uncertainty and variability into the estimation process. Monte Carlo simulation, one of the most commonly used probabilistic techniques, generates multiple iterations of cost estimates by sampling from probability distributions assigned to key input variables. This approach provides a range of possible outcomes along with their associated probabilities, offering insights into the likelihood of cost overruns and project delays.

Comparison of Methods:
The comparison between deterministic and probabilistic methods reveals distinct advantages and limitations:

1. Accuracy and Risk Assessment:
   - Deterministic methods provide a single-point estimate of costs, offering limited insights into the potential range of outcomes and associated risks.
   - Probabilistic methods enable a more robust risk assessment by quantifying uncertainties and providing a probabilistic distribution of costs, allowing stakeholders to better understand and mitigate project risks.

2. Sensitivity Analysis:
   - Deterministic methods lack the capability to conduct sensitivity analysis effectively, as they provide only one cost estimate based on fixed inputs.
   - Probabilistic methods facilitate sensitivity analysis by identifying key drivers of cost uncertainty and evaluating their impact on project outcomes, enabling stakeholders to focus on mitigating high-risk factors.

3. Decision-Making:
   - Deterministic methods may lead to overly optimistic or pessimistic cost projections, potentially influencing decision-making and resource allocation.
   - Probabilistic methods support more informed decision-making by providing a probabilistic distribution of costs, helping stakeholders assess the likelihood of meeting budget targets and identifying opportunities for risk mitigation.

Engaging the Community:
We invite professionals and practitioners in the oil and gas industry to share their perspectives and experiences regarding the use of deterministic and probabilistic methodologies in cost analysis for AFE generation:

- What are your experiences with deterministic and probabilistic methods in estimating project costs?
- How do you assess the trade-offs between accuracy and complexity when choosing between deterministic and probabilistic approaches?
- In what scenarios do you find probabilistic methods particularly valuable for AFE generation in oil and gas projects?
- What challenges have you encountered in implementing probabilistic methodologies, and how have you addressed them?
- How do you communicate the results of probabilistic cost analysis to stakeholders and decision-makers effectively?

Conclusion:
In the realm of oil and gas project management, the choice between deterministic and probabilistic methodologies in cost analysis for AFE generation is crucial. While deterministic methods offer simplicity and efficiency, probabilistic approaches provide a more nuanced understanding of project risks and uncertainties. By embracing probabilistic methodologies, stakeholders can make more informed decisions, mitigate risks, and optimize project outcomes in the dynamic and complex landscape of the oil and gas industry. I look forward to hearing insights and experiences from the community to enrich our understanding and practices in cost analysis for AFE generation.

Thank you for your time and consideration.

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J. VictorGuerrero
President
UnRiskIT, LLC
www.unriskit.net
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I have read the insights presented by the probabilistic approach to AFE in contrast to the deterministic approach. It is true the probabilistic approach broadens the scope of calculating the cost of an intervention in the oil & gas industry and probably gives a more accurate cost analysis. The probabilistic approach, in my opinion, is not exhaustive of the parameters involved or should be involved in the calculation of cost. It risks adding or excluding parameters that may not be easy to calculate - thus causing it to be biased and subjective. It may not necessarily be universally acceptable due to such variabilities. It is not one-size-fits all - meaning that the parameters to be involved in the calculations need to be negotiated. While some costs may be easy to calculate, others such as social, economic, environmental and political costs may complicate AFE.

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Dr. Bazira Henry Mugisha
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Subject: Embracing Complexity: A Response to Dr. Bazira Henry Mugisha's Insights on AFE Cost Analysis

Dear Dr. Bazira Henry Mugisha,

I would like to express my appreciation for taking the time to engage with the discussion on AFE cost analysis methodologies presented in my article. Your perspective sheds light on the intricacies involved in determining project costs within the oil and gas industry, particularly regarding the probabilistic approach.

While I acknowledge your concerns regarding the potential biases and subjectivity inherent in probabilistic methods, I respectfully challenge the notion that these drawbacks outweigh the benefits of a more comprehensive cost analysis framework. In fact, it is precisely because of the complexity and multifaceted nature of oil and gas projects that probabilistic methodologies offer a valuable alternative to deterministic approaches.

Your mention of parameters such as social, economic, environmental, and political costs underscores the intricate web of factors that influence project outcomes. However, it is precisely these factors that probabilistic methods aim to capture by incorporating uncertainty and variability into cost estimation. By utilizing techniques like Monte Carlo simulation, probabilistic methodologies enable project managers to assess the likelihood of cost overruns and identify potential risks associated with these diverse parameters.

Moreover, while you rightfully point out that negotiations may be necessary to determine which parameters to include in cost calculations, this should not be viewed as a limitation of probabilistic methods. Rather, it highlights the importance of collaboration and stakeholder engagement in developing robust cost analysis frameworks tailored to the specific context of each project.

In essence, embracing the complexity of oil and gas projects requires a willingness to adopt flexible and adaptive methodologies that can accommodate a diverse range of factors. While deterministic methods may offer simplicity and efficiency, they inherently overlook the uncertainties and variability that characterize real-world scenarios. By contrast, probabilistic approaches provide a more nuanced understanding of project risks and uncertainties, empowering stakeholders to make informed decisions and optimize project outcomes.

In conclusion, I believe that the benefits of probabilistic methodologies in AFE cost analysis outweigh the challenges highlighted. By embracing complexity and leveraging advanced analytical techniques, we can enhance our ability to navigate the dynamic landscape of the oil and gas industry effectively.

Once again, thank you for your valuable insights, and I look forward to further discussions on this important topic.

Warm regards,

J. Victor Guerrero
President
UnRiskIT, LLC

www.unriskit.net

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VictorGuerrero
www.unriskit.net
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Original Message:
Sent: 03-02-2024 01:15 AM
From: Henry Bazira
Subject: Optimizing Cost Analysis for AFE Generation: A Comparison of Probabilistic and Deterministic Methodologies

I have read the insights presented by the probabilistic approach to AFE in contrast to the deterministic approach. It is true the probabilistic approach broadens the scope of calculating the cost of an intervention in the oil & gas industry and probably gives a more accurate cost analysis. The probabilistic approach, in my opinion, is not exhaustive of the parameters involved or should be involved in the calculation of cost. It risks adding or excluding parameters that may not be easy to calculate - thus causing it to be biased and subjective. It may not necessarily be universally acceptable due to such variabilities. It is not one-size-fits all - meaning that the parameters to be involved in the calculations need to be negotiated. While some costs may be easy to calculate, others such as social, economic, environmental and political costs may complicate AFE.

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Dr. Bazira Henry Mugisha
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Dear, All.

This kind of procedure is almost the same that follows most engineers who
want to do better flow production estimation based on holistic and
probabilistic methods in this matter.

Based on my experiences, when applied probabilistic methods you can obtain
better estimation and risk analysis.

Best regards... ER

Dear all, 

I completely agree with what Victor Guerrero writes. Integrating probabilistic analysis techniques into our cost estimates helps us better understand the key drivers to that estimate, the big risks on which we to focus to have a successful project and ideas on how to improve the project. But why stop there? Layering onto what Elimar Rojas writes, I believe that we should embrace probabilistic techniques on the full economic analysis, reserves through costs, and even incorporating macro uncertainties of policy, tax and project approvals. With regards to Henry Bazira's concern that it is difficult to quantify everything, I totally agree. It sometimes is difficult. But in taking it on, we can better understand how impactful these uncertainties can be to the success of our projects. Just because something isn't perfect, doesn't mean that it isn't useful and insightful. I have been running probabilistic analyses for over 35 years and every one has provided useful insights to help us improve some element of our project. (By the way, a great resource for helping us think through how we can estimate difficult inputs and uncertainties in our evaluations is "How to Measure Anything" by Douglas W. Hubbard.) 

Another push back to probabilistic analysis is the perception that it increases the evaluation time. When we are early in an appraise or concept select phase, where we are still comparing different project approaches, I often see teams going out to third-party engineering teams to get capital cost estimates. This can take months of work. Instead, I have found that using relatively simple ranges and distributions is more than adequate and can provide the team and decision-makers greater insight on the direction the project should take and what we need to do to improve it. 

Lastly, when I see teams recycling in evaluation, with a project that decision-makers are not yet convinced of the viability, decision-makers either are asking the team to run new iterations of the deterministic analysis (like at higher or lower prices) or they are hunting for a different development concept that might be more economic (like smaller capacity). Probabilistic analysis addresses the first issue, and taking time to better frame the decision and identify the potentially viable solutions addresses the second.  

Best regards, 

Kent Burkholder

 

   

Original Message:
Sent: 03-02-2024 12:05 PM
From: Elimar Rojas
Subject: Optimizing Cost Analysis for AFE Generation: A Comparison of Probabilistic and Deterministic Methodologies

Dear, All.

This kind of procedure is almost the same that follows most engineers who
want to do better flow production estimation based on holistic and
probabilistic methods in this matter.

Based on my experiences, when applied probabilistic methods you can obtain
better estimation and risk analysis.

Best regards... ER

In the context of recommended reading on this topic you should check out Patrick Leach's book, "Why Can't You Just Give Me The Number?".

You can also read the 2007 review in Oil IT Journal. 

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Neil McNaughton neilmcn@oilit.com
Editor Oil IT Journal - www.oilit.com
The Data Room
Sevres
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