Central Limit Theorem-based Stochastic Economic Evaluation (CLT-SEE) Model for Evaluating Oil Wells: Case Study from Niger Delta, Nigeria

Abstract

Oil and natural gas production has been highly contributing to world economy and is some countries’ economy root. After the discovery of a new oil/gas field, the operator has to decide whether or not to develop that field. Such decisions rely on the economic evaluation of potential oil/gas fields development when they will be discovered and of the proven oil/gas reserves. The economic indicators used for that purpose are actually computed with deterministic and/or stochastic methods. Deterministic models show limitations while stochastic ones reduce the risks and doubts in the decision making. Stochastic models require the knowledge of the probability distribution of the model inputs, what is costeous in terms of software, data and conditions to be satisfied. Our study proposes a technique, called “Central Limit Theorem-based Stochastic Economic Evaluation (CLT-SEE) Model’’ that eases projects NPV probability distribution determination and the computation of P10, P50 and P90 of projects NPV, IRR and PI. A case study is carried out on a Nigerian’s Niger Delta onshore oil well. The results show the well NPV, IRR and PI are respectively MM$ 84.112, 24.5%, 1.169. The well project P10(NPV), P50(NPV) and P90(NPV) are respectively MM$ 96.4, MM$ 84.16 and MM$ 71.89; P10(IRR), P50(IRR) and P90(IRR) are respectively 27%, 24.75% and 22%; P10(PI), P50(PI) and P90(PI) are respectively 1.34, 1.17 and 1. These stochastic outputs show that the company has 90% of chance to earn at least MM$ 71.89 which is its investment and the likelihood that the project IRR be more than 22% is 0.9. As a result, the use of CLT-SEE model for oil wells economic evaluation offers much more chance and confidence to oil companies to decide righteously in field and well development projects.