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Uncertainty Analysis in Reservoir Characterization and Management

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 1
Ma, Y. Zee, 2011, Uncertainty analysis in reservoir characterization and
management: How much should we know about what we don’t know?, in Y. Z.
Ma and P. R. La Pointe, eds., Uncertainty analysis and reservoir modeling:
AAPG Memoir 96, p. 1 – 15.

Uncertainty Analysis in Reservoir

Characterization and Management:
How Much Should We Know About
What We Don’t Know?
Y. Zee Ma
Schlumberger, Greenwood Village, Colorado, U.S.A.

ABSTRACT
A reservoir is the result of geologic processes and is not randomly generated. However, many
uncertainties exist in reservoir characterization because of subsurface complexity and limited
data. Uncertainties can be mitigated by gaining more information and/or using better science
and technology. How much uncertainties should be mitigated depends on the needs of de-
cision analysis for reservoir management and the cost of information. Uncertainty analysis
should be conducted for investigational analyses and for decision analysis under uncertainty
and risk. To know what needs to be known and what can be known should be the main focal
points of uncertainty analysis in reservoir characterization and management.

INTRODUCTION tific fields. Many consider that, historically, probability

No uncertainty exists in a reservoir, only uncertainty in
our understanding and description of it. A reservoir is
not random; it was deposited geologically and evolved
into a unique hydrocarbon-bearing entity. Matheron
(1989, p. 4) once remarked ‘‘Randomness is in no way a
uniquely defined or even definable property of the phe-
nomenon itself. It is only a characteristic of the model.’’
If a reservoir is not random, why should we use a prob-
abilistic method to build a reservoir model? If a reser-
voir is deterministic in nature, why should we analyze
uncertainties in reservoir characterization?
Before answering these questions, it is useful to brief-
ly review the history of uncertainty analysis and two
doctrines regarding the course of nature in other scien-
as a measure of uncertainty was first introduced by
monks at the Port-Royal monastery in Paris (Arnauld
and Nicole, 1662), although this may not be universally
agreed on. The uncertainty notion in their exemplary
argument, that fear of harm should be proportional to
the probability of an event inspired the development of
the probability theory for uncertainty analysis, which
in the beginning was applied mostly in games of chance.
Uncertainty analysis was largely ignored in the sci-
entific world until the advent of quantum mechanics,
which revolutionized physics in the 20th century. Al-
though nearly all physical sciences were traditionally
considered deterministic, many phenomena in quantum
mechanics could not be explained by Newtonian deter-
ministic laws (Popper, 1979; Hilgevoord and Uffink,

Copyright n2011 by The American Association of Petroleum Geologists.

DOI:10.1306/13301404M963458

1
2 MA
2006). As a result, indeterminism and uncertainty anal-
ysis (initially commonly referred to as uncertainty prin-
ciple) were proposed by several prominent physicists
in the late 1920s. The debate centered on whether the
world was indeterministic or whether quantum me-
chanics simply provided an incomplete description of
a fully deterministic world. This is now referred to as
the ‘‘EPR paradox’’ (Honderich, 2005, p. 237), after the
initials of Einstein, Podolsky, and Rosen, who related
‘‘randomness’’ and uncertainty in quantum mechan-
ics to one’s ignorance or inability to fully understand
or describe some properties of reality (Einstein et al.,
1935). This is very similar to reservoir descriptions. Is
a reservoir random? Or is that our description cannot
be complete while the reservoir itself is deterministic
in the underlying course of nature?
Reservoirs are not random, but are causal in na-
ture, yet indeterministic because of our inability to for-
mulate a complete and precise description and char-
acterization. In other words, although a reservoir was
geologically deposited, and thus causal, it cannot be
deterministically defined or completely determined be-
cause of subsurface complexity and limited data. How-
ever, despite the fact that a reservoir or, more generally,
a geologic phenomenon is not random, it is legitimate
to model it using a stochastic function (commonly with a
‘‘random’’ component) because of the indeterminacy
aspect. In fact, probabilistic approaches provide meth-
ods of choice for modeling subsurface heterogeneities,
including geologic facies (Ma, 2009b) and petrophysical
properties (Journel and Alabert, 1990). Furthermore, re-
gardless of the methodology used, uncertainties will
always exist in reservoir characterization, and proba-
bilistic methods provide viable tools for uncertainty
analysis and quantification (Deutsch and Journel, 1992).
Although the uncertainty principle may have been
somewhat accepted in reservoir characterization, its
practicality has been rather limited. Some consider tra-
ditional frequency probability theory impractical be-
cause of infrequent data (Gillies, 2000; Ma, 2009b).
Others think that the Bayes belief network cannot be
fully believed because it is too subjective (Popper, 1959).
Still others feel that spatial statistics, of which geosta-
tistics is a major branch, is too specialized and too dif-
ficult to be popularized within the main geoscience
community. In other words, three roadblocks limit the
more extensive use of probability theory for reservoir
uncertainty analysis: (1) unbelieved Bayes belief net-
work (e.g., Popper, ‘‘I do not believe in belief’’, 1979,
p. 25, although this is not on geoscience application),
(2) infrequent frequency probability, and (3) too spe-
cialized spatial statistics.
From a practical point of view, many examples of
failed projects have occurred because of the failure to
study subsurface heterogeneity and the lack of un-
certainty analysis for reserve estimates and risk mit-
igation in the reservoir management and decision
analysis. A successful drilling technology project some-
times becomes a great failure economically for these
reasons.
The two goals of uncertainty analysis are to quantify
the reservoir uncertainty and to reduce it. This is critical
because optimal reservoir management, including pro-
duction forecasting and optimal depletion, requires
knowledge of the reservoir characterization uncertain-
ties for business decision analysis. Three questions need
to be answered in reservoir uncertainty analysis.

‘‘How much do we know?’’ This means that we
need to gather as much knowledge as possible about
the reservoir, and analyze and interpret all available
data.

‘‘How much can we know?’’ Not only should we
gather as much data as we can, but we should also
thoroughly explore the data to extract the maxi-
mum information. Thus, we would conduct ex-
ploratory data analysis using geologic, geophysical,
and petrophysical principles, as well as geostatis-
tical methods. Moreover, we ought to weigh the
potential benefits of acquiring additional data to
gain sufficient information and knowledge to
make critical business decisions. In other words,
we must weigh the value of information (VOI) ver-
sus the cost of information (COI).

‘‘How much should we try to know?’’ Like the EPR
paradox in quantum mechanics, subsurface com-
plexity and limited data prevent us from achieving
a total understanding of a reservoir or completely
describe every detail of subsurface heterogeneities.
Therefore, our main emphasis in reservoir charac-
terization should be to define relevant objectives
that impact the business decision and to find re-
alistic solutions accordingly. In other words, we
must define what we really need to know or how
much we should try to know to make the neces-
sary business decisions.
PREDICTION, MODELING, AND
UNCERTAINTY ANALYSIS
Prediction and Modeling
Many have aptly expressed the importance of predic-
tion in science. Take, for example, Poincaré’s well-
known saying, ‘‘It is far better to foresee even without
certainty than not to foresee at all’’ (Poincaré, 1913,

p. 129). In reservoir characterization, prediction is not
only necessary, but also ubiquitous. Because of sub-
surface complexity and limited data, however, our
predictions of reservoir properties inevitably involve
uncertainties.
Geologic and reservoir models are commonly built
to help field development planning or simply to en-
hance our geologic understanding of a reservoir. Mod-
eling is a form of prediction using one or more quanti-
tative methods, that involve uncertainty. It is highly
challenging to analytically define three-dimensional
(3-D) reservoir properties because complex subsurface
heterogeneities occur at many different scales. We can
model them, however, using geologic and petrophys-
ical principles and probabilistic methods. For a model
to represent reality as accurately as possible, the mod-
eling method should integrate all the available data in a
coherent way. Because no unique solution can be found
with the lack of data, a good modeling method should
enable uncertainty analysis and quantification.
In reservoir characterization, geostatistical methods
have been used for both modeling and uncertainty anal-
ysis (Deutsch and Journel, 1992; Ma et al., 2008). Advan-
tages of geostatistical methods, as compared with tra-
ditional mapping techniques, include the capabilities
of better modeling subsurface heterogeneities and un-
certainty analysis of geologic and petrophysical vari-
ables, which will be further discussed in a following
section, Inference Uncertainty.
Uncertainty Analysis and Modeling
To analyze uncertainty in reservoir characterization and
modeling, it is convenient to put it under the frame-
work of a scientific process. That is, uncertainty in the
reservoir characterization and modeling is caused by
the uncertainty in the input data and uncertainty in the
inference, as shown in Figure 1. Uncertainty analysis,
therefore, should include studies of data inaccuracies
and inference uncertainty from data to estimation of
Figure 1. Illustration of the relationships among the input
data, reservoir characterization and modeling process, and
output result. Uncertainty in the result is caused by uncertainty
in the input data and/or uncertainty in the inference.
Uncertainty Analysis in Reservoir Characterization and Management 3
reservoir properties. These will allow a more accurate
quantification of the uncertainty in the modeling result,
which then can be used for reservoir management de-
cision analyses.
An integrated reservoir modeling workflow typi-
cally includes data analysis, interpretations, selection
of an appropriate method that integrates the available
data from various disciplines, and definitions of the
modeling parameters. All these tasks involve uncer-
tainties. In other words, uncertainty can be an inaccu-
racy in data or indeterminacy in reservoir parameters.
Measurement Uncertainty
Uncertainty in data is mainly caused by uncertainties
in measurements and secondarily by data handling.
Several organizations, including the International Stan-
dardization Organization (ISO), the Bureau Interna-
tional des Poids et Mesures (BIPM, 2008; 2009), and the
National Institute of Standardization and Technology
(Taylor and Kuyatt, 1994), have proposed guidelines
for reporting measurement uncertainties. Tradition-
ally, the most common approach was to offer the best
estimate that includes the expression of systematic and
random errors in measurements. More recently, ISO
and BIPM have changed their guidelines to recom-
mend an approach involving the best estimate with
associated uncertainties. The rationale they offered
for this approach was that ‘‘no measurement is exact’’
and ‘‘it is not possible to state how well the essentially
unique true value of the measurand is known, but
only how well it is believed to be known’’ (BIPM, 2009,
p. 2–3).
Uncertainty should be defined so as to characterize
the dispersion of a measurement. Probability distribu-
tions are typically used to characterize such measure-
ment uncertainties. The most commonly used proba-
bility function for stochastic uncertainty characterization
is the Gaussian density, in which variance or standard
deviation characterizes the dispersion of the measure-
ment values. However, a nonaleatoric uncertainty com-
monly, but not always, requires a non-Gaussian den-
sity function.
Inference Uncertainty
Inference uncertainty is much more complex than mea-
surement uncertainty and is more difficult to deal with.
In reservoir characterization, inference uncertainties in-
clude conceptual, interpretational, and methodological
uncertainties, to name a few. Because of the high ex-
pense of drilling, geoscientists commonly have to
make assumptions and create conceptual deposition-
al models, even with limited data in the early stage of
4 MA
exploration. Therefore, conceptual depositional models
typically contain significant uncertainties. In addition,
geologic and seismic interpretations are commonly lim-
ited by the quantity and quality of data and are prone
to cognitive biases, especially a confirmation bias (Ma,
2010). As such, interpreted results also contain signif-
icant uncertainties. Examples of uncertainty analysis
in well-log and petrophysical interpretations can be
found in the chapter by Moore et al. (2011).
The conceptual and interpretational uncertainties
previously discussed can propagate into reservoir mod-
eling. Moreover, geologic, petrophysical, and statistical
parameters used in modeling have uncertainties. For
example, few data are available in early field develop-
ment, and uncertainty is typically high in the net-to-
gross (NTG) ratio (Journel and Bitanov, 2004). Similar-
ly, uncertainties in facies proportion and other geologic
and petrophysical parameters can be quite significant
(Haas and Formery, 2002; Friedmann et al., 2003). Fur-
thermore, choice of the modeling method (e.g., be-
tween probabilistic and analytical approaches or be-
tween different probabilistic methods) can be ambiguous
(Falivene et al., 2006), and specifications of petrophys-
ical parameters in reservoir modeling and uncertainty
analysis are commonly ambiguous as well.
Geostatistics has been used to model geoscience phe-
nomena in the last half century (Journel and Huijbregts,
1978; Chilès and Delfiner, 1999; Hu and Le Ravalec-
Dupin, 2004). Geostatistical techniques enable integra-
tions of various data types and modeling of subsurface
heterogeneities in depositional facies (Ma et al., 2009)
and petrophysical properties (Goovaerts, 2006); how-
ever, both kriging and stochastic simulation have sig-
nificant limitations in assessing local uncertainties. For
example, multiple realizations in a traditional stochas-
tic simulation are equally probable, and their inferen-
tial differences lie only in the random seeds (although
new information can change this, which is discussed
below). It is generally difficult to quantify spatial un-
certainties of a reservoir model using geostatistics alone.
The selection of a model among many realizations for
dynamic simulations can be highly challenging as well.
Several methods, including gradual deformation, opti-
mization (such as probabilistic perturbation and simu-
lated annealing), and the Kalman filter (Deutsch and
Journel, 1992; Hu et al., 2001; Caers, 2007; Zafari and
Reynolds, 2007), have been proposed to help select or
postprocess geostatistical reservoir models, with vari-
ous degrees of success.
It is, nonetheless, more straightforward to assess un-
certainties of some ‘‘composite’’ reservoir variables,
such as pore and hydrocarbon volumetrics, using sto-
chastic simulations. In fact, applications to volumetric
assessments have been quite extensively discussed
(Berteig et al., 1988; Ma et al., 2008), and more exam-
ples can be found in several chapters in this volume.
Uncertainty analysis in reservoir characterization
also includes transfer of the geologic uncertainty in a
reservoir model to reservoir performance forecasting
(Ballin et al., 1993; Vanegas et al., 2011), a stochastic
history match that deals with both geologic and engi-
neering uncertainties (Amudo et al., 2008), and uncer-
tainty reduction and quantification using model updat-
ing with production data assimilation (e.g., Devegowda
and Gao, 2011). To date, several methods have been
proposed to deal with dynamic uncertainties or transfer
of the static uncertainty to dynamic uncertainty, in-
cluding experimental design (Friedmann et al., 2003),
gradual deformation (Hu and Le Ravalec-Dupin, 2004),
proxy models (Vanegas et al., 2008), Kalman filters
(Zafari and Reynolds, 2007), and distance-based ap-
proaches (e.g., Caers and Scheidt, 2011).
Parameter Uncertainty Quantification
Similar to the uncertainties in measurements, uncer-
tainties of reservoir parameters are typically charac-
terized by a probability distribution. Uncertainty quan-
tifications of these parameters in early field development
based on various data sources and geologic scenarios
have been discussed by many (Haas and Formery, 2002;
Journel and Bitanov, 2004; Caumon et al., 2004). Param-
eter uncertainty in experimental design is commonly
categorized into two or three levels, such as low, medi-
um, and high, instead of using a probability distribution.
Remarks
Uncertainties in data and inference (e.g., reservoir mod-
eling) naturally lead to uncertainties in the results of
reservoir characterization. As previously mentioned,
some ‘‘composite’’ reservoir parameters, such as hy-
drocarbon pore volume, are expressed by several other
geologic and petrophysical variables, and their global
uncertainties can be quantified by a probability dis-
tribution constructed by building multiple scenario
models and multiple realizations of each contributing
property.
Probability distributions of uncertain quantities in
reservoir characterization are generally empirical, al-
though some general mathematical laws may cause
them to be nearly normal or lognormal. Addition of
multiple random variables tends to produce a normal
distribution as a consequence of the central-limit the-
orem (Papoulis, 1965, p. 266), and multiplication of
many variables tends to yield a lognormal distribution
(Aitchison and Brown, 1957). The resultant probabi-
listic distribution, however, will be highly influenced

by the distributions of the input variables and their
correlations, especially when data are limited. For ex-
ample, the histogram of the oil-pore volume is highly
influenced by the histograms of porosity and oil sat-
uration (So), as shown in Figure 2.
THE VALUE OF INFORMATION
Because uncertainty can be considered as an under-
determination problem, more data could naturally
reduce the uncertainty. This is the ‘‘value of informa-
tion.’’ The VOI is discussed mostly under the frame-
work of decision analysis in the oil and gas industry
(Cunningham and Begg, 2008; Bratvold et al., 2009;
Bailey et al., 2011). The focus here is on the VOI in
reducing uncertainties in reservoir characterization
and management. The VOI is most obvious in a totally
random system, such as a lottery. The Powerball anal-
ogy (Ma and Gomez, 2009) can be used to illustrate the
VOI. Powerball currently has two drums of numbers:
the first is composed of 59 numbers and the second is
composed of 39. Five numbers are drawn from the first
drum, and one (the Powerball) is drawn from the
second. The probability of winning the grand prize for
each ticket (a combination of six numbers) is approx-
imately one in 195 million (Powerball, 2010), such as
ð59  5Þ! 5! 1 1
 ¼
59! 39 195; 249; 054
Assuming one could play after the first two draw-
ings, the winning probability would increase to one in
slightly more than one million, such as
ð57  3Þ! 3! 1 1 data points at the well locations in Figure 3A are ini-
 ¼
57! 39 1; 141; 140
In other words, knowing two numbers would yield
a 17,100% increase in the winning odds (i.e., 195.25/
1.14 ffi 171). The VOI in reducing the uncertainty in
this case is self-evident.
Uncertainty Analysis in Reservoir Characterization and Management 5
Figure 2. Histograms of
(A) porosity, (B) oil satu-
ration, and (C) oil pore
volume.
Similarly, using more data could significantly re-
duce uncertainty in reservoir characterization. An ex-
ample of VOI by comparing depositional facies clas-
sifications using two well logs versus one well log is
found in chapter 6 in this volume. Pitfalls exist, how-
ever, because a reservoir is not random or data quality
may be questionable. More data sometimes cause
more ‘‘apparent uncertainties.’’ This complication can
be caused by subsurface heterogeneity or data hetero-
geneity or quality. Before examining examples of in-
ference bias related to subsurface heterogeneities, var-
ious types of data in reservoir characterization are
briefly reviewed.
Because reservoir characterization is a multidisci-
plinary process, it involves different types of data,
including hard data and soft data. Typically, hard data
provide direct information, whereas soft data are con-
sidered to be indirect information. For example, core
data commonly provide direct measurements of rock
formations, whereas seismic data commonly provide
indirect information of rock formations. Some well
logs may be used as direct information, whereas others
are rather indirect information (Moore et al., 2011).
Although interpretations are not primary data, some-
times they can be used as soft data. For example, an
early task in the reservoir characterization is geologic
interpretation, the results of which are commonly used
for reservoir modeling.
Hard Data and the Value of Information
In petroleum geostatistics, hard data are commonly
synonymous with reliable information. A simple syn-
thetic example shown in Figure 3 demonstrates the
VOI using NTG ratios. Assume that only three hard
tially available. It would be difficult to know if the area
contains significant hydrocarbon resources because con-
siderable uncertainty exists regarding the global NTG
and depositional model. By adding four wells, which
show high NTG ratios (Figure 3B), it would be reason-
able to delineate a channel complex in the area, assuming
6 MA
Figure 3. Illustration of the VOI using NTG
ratios for reservoir delineation. (A) Only
three data points were initially available.
(B) Four additional data points have
helped delineate the channel complex
(shown between the two dotted lines).
that the delineation is consistent with the regional ge-
ology. Thus, the four additional data points would pro-
vide valuable information that improves our under-
standing of the prospect.
Soft Data and the Value of Information
Typically, reservoir characterizations lack sufficient di-
rect measurements. Thus, reservoir models built only
with hard data tend to be too unconstrained and lack-
ing in geologic realism (Massonnat, 1999). However,
geologic conceptual models tend to capture regional
characteristics but inadequately represent smaller scale
subsurface heterogeneities. An integrated approach that
combines both geologic knowledge and hard data can
help more accurately model the reservoir and reduce
the uncertainty.
Many geostatistical methods enable integration of
soft data, provided that geologic knowledge is numer-
ically represented in trend maps or trend curves. In ad-
dition, a methodology based on the hierarchy of sub-
surface heterogeneities can improve the integration of
a variety of geologic information, including use of strat-
igraphic reference classes and spatial propensity anal-
ysis (Ma et al., 2009). For example, facies data can be
integrated with a depositional conceptual model to cre-
ate facies probabilities, which then can be used to con-
strain a geostatistical model to be geologically more
realistic (Ma, 2009b; Yu et al., 2011).
Value of Information and Sampling Bias
In theory, as more data become available, our knowl-
edge of the reservoir should improve. A sampling bias,
however, can complicate the VOI. Consider the exam-
ple illustrated in Figure 3. The average NTG based on
the first three wells was 23%. After drilling the four
additional wells, the average NTG from all the seven
wells was apparently 57%. However, the delineated
channel complex, which represents about three-fifths
(60%) of the area, had five data points. The overbank
area, which represents two-fifths (40%) of the area, had
only two data points. Thus, a sampling bias exists, which
should be accounted for. The global NTG estimated
using the polygonal tessellation or propensity zoning–
based declustering (Ma, 2009b) is about 48%. The 57%
global NTG from the average of the raw data repre-
sents nearly a 19% overestimation (i.e., [0.57  0.48]/
0.48 ffi 19%).
Sampling bias is generally unavoidable in explora-
tion and production. Commonly, simply for economic
reasons, it is intentional. No one wants to spend tens
of millions of dollars to drill a dry hole just for collect-
ing data. Operators drill wells in what is thought to be
the best parts of the reservoir or play, and data ob-
tained from these wells may not represent either aver-
age or the full range of reservoir properties. Whereas
avoiding sampling bias is difficult in general, the main
task should be learning how to incorporate it in busi-
ness and reservoir modeling decision making. Aiming
to drill in the ‘‘sweet spots’’ in light of subsurface het-
erogeneities makes predictions from data to a reser-
voir model particularly treacherous. In some cases,
declustering can be performed to mitigate sampling
bias. In other cases, inference needs to be made that
accounts for the sampling bias (Ma, 2009a).
Value of Information versus Cost of Information
The VOI lies in reducing uncertainty when more in-
formation is used. From a perspective of reservoir man-
agement, we must also consider the COI. The differ-
ence between the VOI and COI is known as the ‘‘net
value of information’’ (NVOI). In reservoir character-
ization and management, the following questions that
weigh VOI and COI commonly arise:

Should we acquire a new 3-D seismic survey?

Should we drill a few new wells to delineate the
reservoir?

Should we core this well?
To answer these questions, we need to estimate the
VOI versus the COI. Generally, if the VOI outweighs

the COI, that is, a positive NVOI, it is worth obtaining
new information. In short, more data will help more
accurate reservoir characterization; but for reservoir
management, the benefit of collecting more data (i.e.,
VOI) might be weighed against the cost of collecting
data. Obtaining the necessary data at the minimum
cost is one important principle for reservoir manage-
ment (Thakur, 1990).
Cost of Misinformation
An important element of the VOI is the quality of in-
formation or data quality. If data quality is very poor, it
does not provide useful information. In fact, it may
lead to erroneous results. This is the ‘‘cost of misin-
formation’’ (COM). The COM includes both the COI
and the damage caused by the misinformation. Dam-
age from the COM could be much greater than the
COI. In the example shown in Figure 3B, imagine that
the actual NTG datum in the central area was 10%
instead of 100%. In that case, the depositional model
and the global NTG ratio would be wrong. This likely
would lead to a misunderstanding of the reservoir and
a poor decision for reservoir management.
Clearly, the COM includes the cost of errors simply
because errors represent misinformation. Jablonowski
et al. (2008) discussed how to assess the cost of errors
in reserve estimates and other production and eco-
nomic variables.
VARIABILITY, UNCERTAINTY, RISK, AND
DECISION ANALYSIS
Although the definitions of variability, uncertainty, and
risk are provided in the glossary of this volume, it is
useful to discuss them here in more detail. In particular,
exploring the relationships among these concepts can
illuminate our understanding of their differences and
applicabilities in reservoir characterization and reser-
voir management.
Variability and Uncertainty
In reservoir characterization, ‘‘variability’’ refers to the
magnitude of change of a geologic process, petrophys-
ical property, or any reservoir variable. Variability is
totally objective as it is simply a property of a phenom-
enon. Generally, subsurface variability is high be-
cause multiple scales of heterogeneities exist, such as
in structure, stratigraphy, depositional facies, petro-
physical properties, and fluids. As such, characteriza-
tion of subsurface variability is rather complex. Geo-
Uncertainty Analysis in Reservoir Characterization and Management 7
statistical methods are commonly used to model the
spatial variability of facies and petrophysical variables
(Deutsch and Journel, 1992; Ma, 2009b; Ma et al., 2011).
Note that early geostatistical approaches mostly used
kriging methods because of their local estimation ac-
curacy. Conditional stochastic simulation was pro-
posed (Journel and Huijbregts, 1978; Dubrule, 1989) to
better model the spatial variability of geoscience phe-
nomena. Although various kriging methods are still
largely used in the mining application, stochastic simu-
lation has been more commonly used in petroleum geo-
statistics, especially to describe and characterize the con-
nectivity of rock properties (Journel and Alabert, 1990).
Uncertainty, however, is simply the result of our
not knowing enough about a variable. Uncertainty may
refer to inaccuracy in data or indeterminacy or indef-
initeness of a variable. Uncertainty differs from vari-
ability in that even when a parameter has no variability
(i.e., a constant), uncertainty may still exist simply be-
cause we have no information about it. However, un-
certainty is commonly highly correlated with vari-
ability because high variability tends to cause more
unknowns, consequently more uncertainties. An ex-
ample of future oil price, which is discussed below, will
further illustrate this relationship.
Error and Uncertainty
It is important to distinguish uncertainty from error.
Whereas an error is the difference between an indi-
vidual result and the true value of a quantity, uncer-
tainty of a quantity takes the form of a range as a result
of the unknown factors. Nevertheless, an intrinsic re-
lationship exists between error and uncertainty (Ma,
2010). Larger uncertainties in the input data are more
likely to cause errors in the reservoir characterization
result and business decision. Conversely, errors in geo-
logic, geophysical, petrophysical, or engineering data
will cause more uncertainties in reservoir characteri-
zation and modeling.
Uncertainty and Risk
In common language, ‘‘risk’’ may simply refer to the
possibilities that undesirable events may occur. For
example, a risk exists that a well might be a dry hole,
or, smoking increases the chance of lung cancer. In this
sense, risk and uncertainty have somewhat similar
connotations. More theoretically, however, ‘‘risk’’ is
defined as the product of the probability of occur-
rence of an undesirable event and the consequence of
its occurrence (see Glossary). Therefore, risk has two
components: an uncertainty component and a conse-
quence component. Note that although sometimes
8 MA
Table 1. Illustration of the EMV method for evaluating two alternative choices.
Drill
Possible Outcome Probability Net Present Value
Dry hole 0.30 $1,000,000
5 million bbl 0.35 $2,000,000
10 million bbl 0.25 $4,800,000
25 million bbl 0.10 $18,000,000
Expected monetary
value (EMV)
risk apparently refers to variability (Markowitz, 1991,
p. 188) or uncertainty, it may still implicitly connote an
unspecified consequence of the uncertainty.
Because of the consequence component of the risk
equation, risk has a direct impact on decision analysis.
For example, a possible perdition (or any loss) caused
by a bad prediction is part of risk analysis but not part
of uncertainty analysis per se. In fact, it is commonly
argued that the consequence of being wrong must dom-
inate the probability of being wrong in decision anal-
ysis. As previously mentioned, the Port-Royal authors’
historic argument that fear of harm should be propor-
tional to the probability of an event (Arnauld and Nicole,
1662) supports the notion of uncertainty analysis, but
it says nothing about the consequence component of
the risk. As Bernstein (1998, p. 100) noted regarding
the Port-Royal philosophy, ‘‘only the pathologically
risk-averse make choices based on the consequences
without regard to the probability involved.’’ By con-
trast, modern risk analysis, which was developed un-
der the framework of utility theory, argues that ‘‘only
the foolhardy makes choices based on the probability
of an outcome without regard to its consequences’’
(Bernstein, 1998, p. 100).
Risk and Reward
Risk should be discussed with reward because risk
could be reduced to zero if one does not care about the
potential benefit. It is well known that the oil explora-
tion and production business is highly risky, but po-
tential rewards should not be ignored. Otherwise, no
one would take the risk to find oil. Pratt (1952) gave
good examples of risk taking in the early days of the oil
business. He described that many early explorers in
the United States took high risks to drill wells at ‘‘un-
favorable’’ locations and discovered major oil fields.
He summarized this phenomenon by saying (p. 2235)
‘‘Since the very inception of the industry, the finding
and producing of oil in the United States have been
carried on by literally thousands of independent enter-
Farm Out
Expected Value Net Present Value Expected Value
$300,000 0 0
$700,000 $2,000,000 $700,000
$1,200,000 $2,400,000 $600,000
$1,800,000 $6,000,000 $600,000
$3,400,000 $1,900,000
prises; thousands of individuals, . . ., each spurred on to
the drilling of exploratory wells by the assurance that
if he made a discovery, he would reap a reward . . .’’
This phenomenon explains why the United States pro-
duced nearly two-thirds of all the oil that the world had
consumed before 1952, and the discovered hydrocar-
bon resource between 1920 and 1952 was nearly nine
times greater than the previous estimate of the total
resource! By these historical examples, we don’t mean
to imply that taking risks will always allow one to reap
the reward. By definition, risk implies possibility of a
negative consequence.
Traditionally, evaluation of a project or proposal was
mostly based on cost-benefit analysis (CBA). This al-
lows decision makers to assess the monetary value of
a proposal or project, in which all the costs and bene-
fits at different times are converted into net present
values (NPVs) with assumed rates of return on invest-
ments. When uncertainty is present, CBA should be
evaluated with respect to the probability of occurrence
for each possible outcome. Evaluating expected mon-
etary value (EMV) (Ikoku, 1985; Bell, 2007), or expected
return (Markowitz, 1991), is a basic method of calcu-
lating the potential benefit under uncertainties. This
method includes the following steps: (1) defining pos-
sible outcomes, (2) assigning the probability for each
possible outcome, (3) evaluating profit or loss (e.g., in
terms of NPV) for each outcome, (4) computing the
weighted average profit or loss (i.e., expected value
[EV]), and (5) selecting the scenario that has the highest
EMV or expected return.
Table 1 gives a simple example of two alternatives
(drill or farm out) with four possible outcomes. The dril-
ling EMV ($3.4 million) is greater than the farm-out
EMV ($1.9 million) and, therefore, is a better alternative.
The EMV method considers not only the probabil-
ities of different scenarios, but also their correspond-
ing monetary costs and profits. As such, better deci-
sions can be made using this method compared with
methods purely based on probabilities (Taleb, 2005,
p. 98–101). Nevertheless, the EMV method has several

pitfalls, including difficulties involved in choosing pos-
sible outcomes and in accurately assigning correspond-
ing probabilities of occurrences. In many cases, these
parameters cannot be adequately defined. Another more
important shortcoming of the EMV lies in no consid-
eration of the consequence of the risk. In fact, the sole
objective of maximizing expected monetary return has
been found inadequate since the 1800s because many
risk-taking strategies based on probability could not be
explained, notably the St. Petersburg paradox (Savage,
1972, p. 93; Bernstein, 1998, p. 106–108). An investment
may be good for a particular investor or company, but it
may not be good for another investor or company be-
cause of their different financial and organizational sit-
uations. Hence, the consequences differ. Some may
prefer more conservative investments with lower but
surer returns, whereas others may prefer more aggres-
sive investments with potentially higher returns.
The utility theory is capable of considering the dif-
ferent preferences of investors and companies (Ikoku,
1985; Markowitz, 1991; Bell, 2007). Although a detailed
discussion on utility theory is beyond the scope of this
chapter, Figure 4 illustrates two simple utility func-
tions. The straight dotted line represents impartiality
toward profit or loss. Impartiality here does not imply
stoicism. Instead, it means that the magnitude of the
pain caused by the loss of money is the same as the
magnitude of pleasure caused by the gain of an equiv-
alent amount of money. In many real cases, the sadness
(negative utility) caused by a loss affects people more
significantly than happiness (positive utility) that a gain
creates. The solid curve in Figure 4 represents such a
risk-averse preference. Notice the gradual increase
Figure 4. Illustration of two utility functions for risk preferences.
The horizontal axis represents loss or profit (M stands for million
dollars), and the vertical axis represents the utility or value
(utility is a generalization from the old pleasure-pain index, as
it has a broader connotation). The dotted line represents a
risk-neutral stance toward profit or loss. The bold curve
represents a risk-averse preference.
Uncertainty Analysis in Reservoir Characterization and Management 9
Figure 5. Illustration of the relationship between risk and
potential reward or loss.
in utility for gains and the steeper drop in utility for
losses. In this risk profile, an investor (or a company)
must gain about $3.5 million (utility = 5) to achieve a
magnitude of happiness equal to the pain of a loss of
just $0.5 million (utility = 5). Kahneman and Tversky
(1979) derived a risk preference curve (also called val-
ue function) that is concave for gain and convex for
loss with steeper drops. Many consider this value func-
tion representative of most people’s risk profile. More
risk profiles can be found in Ikoku (1985, p. 203–209)
and Markowitz (1991, p. 286–294).
The common saying ‘‘Am I paid for the risk I’m
taking?’’ nicely characterizes the principle of balanc-
ing the risk and reward. Consider the following meth-
od of achieving such a balance. Figure 5 illustrates the
well-known risk-reward relationship from the modern
portfolio theory (Markowitz, 1952, 1991), which helped
Markowitz win the 1990 Nobel Prize in economics. In
general, a certain relationship, albeit a cloud relation-
ship (i.e., large spread in the crossplot), exists between
the risk taken and the potential profit from the invest-
ments. Whereas risk-averse investors should choose
low-risk investments, risk takers may want to choose
higher risk investments for potentially greater returns.
Because of the loose cloud relationship between the
risk and reward, regardless of the risk profile, it is wise
to choose investments close to the ‘‘efficient frontier,’’
which represents the highest return for a given risk
taken. An even better choice would be to maximize the
potential reward while minimizing the risk. This prin-
ciple can be applied to reservoir optimization (Bailey
et al., 2011) and exploration and production project se-
lection and management (Adams et al., 2001). Note that
‘‘risk’’ in this context refers to the undesired variability.
10 MA
Table 2. Illustration of the utility method for evaluating two alternative choices.
Drill
Net Present
Possible Outcome Probability Value
Dry hole 0.50 $1,000,000
10 million bbl 0.50 $5,000,000
When the consequence component is also considered,
the risk is nicely described by the common saying, ‘‘Is
the probability that I end up with a ‘goose egg’ too high
for me to handle the consequence?’’
Decision Analysis Under Uncertainty or Risk
Pascal’s famous ‘‘wager’’ in his book, Pensées (Pascal,
1670; Hajek, 2008), may have been one of the earliest
and most widely known contributions to decision anal-
ysis under uncertainty (Miles, 2007). Modern decision
analysis, however, has developed mostly since the end
of World War II, incorporating utility theory and risk
preferences into making decisions under uncertainty
and risk.
In general, it is wise to reduce uncertainty to a rea-
sonable level before making a decision, advice aptly
captured in the saying, ‘‘Nothing can be concluded
until the uncertainty is mitigated.’’ As previously
noted, the VOI is one way of mitigating uncertainties.
Improving the technologies, methods, and processes of
reservoir characterization can also mitigate uncertain-
ties for reservoir management. Even after mitigating
uncertainty, however, we must still make decisions
under uncertainty, albeit less than before. Therefore,
our ability to make decisions under uncertainty is crit-
ical both in business and in life. Here, the risk equation,
and more specifically, the consequence component of
the risk equation, is a factor. Figure 5 shows that as risk
increases in a project or investment, uncertainty in the
return increases, whereas the probability of a higher
return improves. The question is: Can we afford the
loss? If not, then reducing the risk will be in order,
although this will also reduce potential returns on the
investment.
Table 2 illustrates a simple example of a decision
analysis under uncertainty and risk in which two choices
exist. The drilling EMV ($2,500,000–$500,000 = $2.0 mil-
lion) is greater than the farm-out EMV ($1.25 million).
Therefore, based on the EMV, which considers the un-
certainties of these two outcomes, we should drill. How-
ever, if we are very risk averse, having the risk prefer-
Farm Out
Expected Monetary Net Present Expected Monetary
Value Value Value
$500,000 0 0
$2,500,000 $2,500,000 $1,250,000
ence of the solid curve in Figure 4, we could calculate
the utilities of the drilling and farm out as follows:
Utility of drilling ¼ 0:5 ð5Þ þ 0:5 ð4Þ ¼ 0:25
Utility of farm out ¼ 0:5 ð0Þ þ 0:5 ð2Þ ¼ 1:00
Because the utility of farming out is greater than that
of drilling, we should farm out the property. This ex-
ample shows how EMV enables us to make decisions
under uncertainty, whereas the utility theory enables us
to make decisions under risk, provided that the risk
profile is defined. Obviously, a simple utility function
was used in this example. In practice, the definition of
the utility function based on the company’s particular
situations may be quite challenging, and utility also
changes with time (Grayson, 1962).
Other methods of decision analysis under uncer-
tainty have been proposed. For example, material un-
certainties (e.g., rig or seismic equipment uncertainty)
can be integrated into a business decision through an
appropriate valuation of future information using de-
cision trees or Monte Carlo simulation (Prange et al.,
2006; Bailey et al., 2011). For cases of extremely high
risk, we may need to make special considerations in
decision analysis (Taleb, 2007).
Example: Oil Price Variability, Uncertainty, and Risk
Crude oil price (COP) is volatile and its impact on the
exploration and production business is extraordinarily
large. Figure 6 shows the weekly COP from January
1997 to August 2009. Overall, the COP shows a very
high variability, but it varies more in some periods
than others, notably during the last 2 to 3 yr. Between
August 2006 and August 2009, the COP average was
$73.08, with a standard deviation of 24.84. By contrast,
the COP average from January 1997 to December 1999
was $15.75, with a standard deviation of 4.21. Obvi-
ously, COP variability during the last 3 yr has been much
greater. As previously mentioned, because variability
is simply a property of a phenomenon, it is totally
 Uncertainty Analysis in Reservoir Characterization and Management
objective. However, uncertainty is a result of unknowns.
No uncertainty is seen in the COP shown in Figure 6
simply because it is a collection of historic data. None-
theless, the high variability of COP over time would
imply a high degree of unpredictability or high uncer-
tainty in the future COP.
Figure 7A shows a plot of monthly COP data from
January 2000 to September 2002 and the predicted COP
for October 2002 to December 2003 by the U.S. Energy
Information Administration (EIA). Because of the rel-
atively low variability in the COP between January 2000
and September 2002, the uncertainty range of the pre-
diction was quite small. Figure 7B shows the actual
weekly COP data. It fell within the EIA (U.S. EIA, 2009)
predicted uncertainty range, which had a 95% confi-
dence interval. Nevertheless, variability in the actual
COP was greater than in the prediction.
It is possible for the COP to go outside of the 95%
confidence uncertainty range. In the fall of 2007, for
example, no one predicted that the COP would reach
$140 per barrel in 2008. When it actually reached that
price in the summer of 2008, no one predicted it
would drop below $40 per barrel by the end of 2008.
Some even suggested that the $50 COP was history,
and that it would never happen again. Needless to say,
it did. The high variability in the COP during the last
2 to 3 yr caused the EIA and other institutions to in-
crease the uncertainty range of their COP predictions.
Figure 8 shows the EIA (U.S. EIA, 2009) prediction of
the yearly average COP from 2009 to 2030. The large
uncertainty range in the prediction reflects mainly the
impact of the high COP volatility during the last 3 yr.
Note also that the range increases as a function of time,
11
Figure 6. Weekly crude oil price (COP)
from all countries from January 3, 1997, to
August 14, 2009 (from U.S. EIA, 2009).
reflecting greater uncertainty as the prediction moves
away from the existing COP data.
Although uncertainty in the COP may be essentially
the same for all the exploration and production com-
panies, each company’s risk relative to it may be very
different because the consequences of dramatic changes
in the COP vary from one company to another. A dra-
matic plunge in the COP during a short period, as we
witnessed during late 2008 to early 2009, caused severe
budget constraints in some companies. Others experi-
enced less impact because of their asset base, diversi-
fication, and/or hedging.
CONCLUDING REMARKS
Although a reservoir is the result of geologic processes
and is not random (when we say that it is random, we
say it heuristically), it is legitimate to use probabilistic
approaches in reservoir characterization and model-
ing. Probabilistic methods should be used in combina-
tion with established geologic, petrophysical, geophys-
ical, and reservoir engineering principles in reservoir
characterization.
Generally, many types of uncertainties exist in res-
ervoir characterization. Data uncertainties, if not miti-
gated, can propagate into subsequent reservoir charac-
terization processes and cause greater uncertainties
or errors in the results. Improving measurement tools
can mitigate measurement uncertainties. Inferential un-
certainties can be mitigated by acquiring more data,
and/or using better science and technology.
12 MA

Figure 7. (A) Monthly crude oil price (COP)

projection by the U.S. EIA (2009) for the
period from October 2002 to December
2003. Data from January 2000 is shown
for reference. The band between the two
dotted lines represents the uncertainty
range with 95% confidence. (B) Actual
weekly COP during the same time span
(from U.S. EIA, 2009).

Figure 8. Yearly average crude oil price

(COP) from 1980 to early 2009 (historic
data) and projections (solid curve) to
2030 with an uncertainty range (band
between the two dashed curves) (from U.S.
EIA, 2009). Note that the yearly average
COP has less variability than monthly,
weekly, or daily averages. For example, the
average COP in 2008 was about $100,
whereas the weekly average COP ranged
from $36 (in the week of December 26) to
$137 (in the week of July 4).
 Uncertainty Analysis in Reservoir Characterization and Management
One of the main reasons to analyze and quantify
uncertainty is to enhance decision analysis. In general,
business decisions are made under uncertainty be-
cause uncertainty may be mitigated, but cannot be
completely eliminated. How much we attempt to mit-
igate uncertainty should depend on the needs of de-
cision analysis and the cost of information. Uncertainty
analysis should not be for its own sake, but instead
should support investigational analyses, decision anal-
ysis under uncertainty and risk management. With lim-
ited data, it is impossible to describe subsurface het-
erogeneities at all levels of detail. But it is possible to
describe them in relevant details. To know what needs
to be known and to know what can be known (e.g., by
balancing the complexity of the problem, availability of
information, cost of acquiring new information, and
timeline, etc.) should be the main focus of uncertainty
analysis in reservoir characterization and management.
ACKNOWLEDGMENTS
The author thanks Schlumberger Ltd. for permission
to publish this work and the reviewers for the useful
suggestions.
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