The use of probabilistic approach to estimate field development costs in preparation of investment project of assets development on geological exploration stage

Abstract

The article discusses about the use of probabilistic approach to estimate the costs of surface facilities in the early stages of investment projects estimation, starting from the accepted prerequisites for creation probabilistic models for main types of surface facilities, determination of the variability intervals to evaluation of the impact on economic evaluation of the project at the end. The paper describes the main shortcomings of the common deterministic (scenario-based) approach to estimate the costs of surface facilities and the benefits of probabilistic cost estimating. Construction of probability distributions is based on statistically data of the actual surface facilities costs of the company, structured by types, diameters, regions, and other characteristics. The main drivers of changes in value and uncertainty of different types of surface facilities are analyzed. On the basis of probability distributions by types of construction objects with the use of specialized software the final distribution of costs for surface facilities of the asset, allowing to estimate the range of changes in value with a given probability is calculated. For example, the results of the analysis show that the implementation of pessimistic or close-to-it scenario of surface facilities cost can often lead to a significant reduction in the effectiveness of the project. In the early stages of project evaluation, when there are no field data, project documentation, in other words only very limited set of project information is available, the proposed methodology allows to evaluate and justify the interval of possible variation of the investment volume with a given probability. Using the proposed approach allows us to more fully appreciate the risks on the underlying assets, and increase the flexibility of investment decisions.