Some aspects of resource uncertainty and their economic consequences in assessment of the 1002 Area of the Arctic National Wildlife Refuge

Exploration ventures in frontier areas have high risks. Before committing to them, firms prepare regional resource assessments to evaluate the potential payoffs. With no historical basis for directly estimating size distribution of undiscovered accumulations, reservoir attribute probability distributions can be assessed subjectively and used to project undiscovered accumulation sizes. Three questions considered here are: (1) what distributions should be used to characterize the subjective assessments of reservoir attributes, (2) how parsimonious can the analyst be when eliciting subjective information from the assessment geologist, and (3) what are consequences of ignoring dependencies among reservoir attributes? The standard or norm used for comparing outcomes is the computed cost function describing costs of finding, developing, and producing undiscovered oil accumulations. These questions are examined in the context of the US Geological Survey's recently published regional assessment of the 1002 Area of the Arctic National Wildlife Refuge, Alaska. We study effects of using the various common distributions to characterize the geologist's subjective distributions representing reservoir attributes. Specific findings show that triangular distributions result in substantial bias in economic forecasts when used to characterize skewed distributions. Moreover, some forms of the lognormal distribution also result in biased economic inferences. Alternatively, we generally determined four fractiles (100, 50, 5, 0) to be sufficient to capture essential economic characteristics of the underlying attribute distributions. Ignoring actual dependencies among reservoir attributes biases the economic evaluation.