Application of analytic hierarchy process in upstream risk assessment and project evaluations

This report adapts the application of a methodology known as Analytic Hierarchy Process (AHP) to upstream Exploration & Production (E&P) project evaluations for the oil and gas industry. The method can be used to simplify the process of decision making, specifically when several parameters or variables?mostly uncertainties or risk variables?are being considered for different investment options. This method has been used in a large number of applications in several research areas where evaluation and decision making is a key issue. It simplifies the considerations that the evaluators must be aware of to assign probability or certainty factors to the parameters by using a relative intensity scale. We apply the method to the quantification of the risk involved in typical upstream projects. Although a decision as large as investment in oil and gas projects can not be based solely on risk factors, it is true that the risk attitude of the investor will ultimately play a significant role. This method gathers all the possible factors that can affect a project at any stage and provides the user with a single number; it condenses all the considerations and preferences of the investor or decision maker and ranks the investment alternatives from a risk point of view. A typical problem confronted with E&P project assessment (as well as in many other industries) is that the criteria selected may be measured on different scales, such as dollar value, stock-tank barrels, standard cubic feet, units of area, and so on. Some might even be intangible for which no scales exist, such as financial environment, management problems, or social unsteadiness. Measures on different scales, obviously, can not be directly combined, and this is part of what makes an integral assessment of any project such a difficulty. It is up to the decision maker to put all these evaluations?which may be still in different or subjective scales?on an overall comparative basis. This is where the AHP becomes useful, by gathering criteria of different natures and dimensions, and putting them all together on a single scale, which is derived from the decisions maker?s preferences and risk attitude.