Application of price uncertainty quantification models and their impacts on project evaluations

This study presents an analysis of several recently published methods for quantifying theuncertainty in economic evaluations due to uncertainty in future oil prices. Conventionalprice forecasting methods used in the industry typically underestimate the range ofuncertainty in oil and gas price forecasts. These forecasts traditionally considerpessimistic, most-likely, and optimistic cases in an attempt to quantify economicuncertainty.The recently developed alternative methods have their unique strengths as well asweaknesses that may affect their applicability in particular situations. While stochasticmethods can improve the assessment of price uncertainty they can also be tedious toimplement. The inverted hockey stick method is found to be an easily applied alternativeto the stochastic methods. However, the primary basis for validating this method hasbeen found to be unreliable. In this study, a consistent and reliable validation ofuncertainty estimates predicted by the inverted hockey stick method is presented.Verifying the reliability of this model will ensure reliable quantification of economicuncertainty.Although we cannot eliminate uncertainty from investment evaluations, we canbetter quantify the uncertainty by accurately predicting the volatility in future oil and gasprices. Reliably quantifying economic uncertainty will enable operators to make betterdecisions and allocate their capital with increased efficiency.