Conventional oil price forecasting methods in the petroleumrnindustry typically consider uncertainty by incorporatingrnoptimistic, pessimistic, and most-likely cases. Commonly,rnthese price projections are “hockey stick” forecasts, I.e.,rnforecasts that are initially flat or decline for some period ofrntime and then increase monotonically. Review of historicalrnforecasts by industry and governmental organizations showrnthat conventional forecasting methods often fail to capture therntrue uncertainty associated with oil and gas prices. Performingrndiscounted cash flow calculations using conventional oil andrngas price forecasts will therefore underestimate the uncertaintyrnassociated with project economic performance indicators.rnAkilu et al. Developed the Inverted Hockey Stick (HIS)rnMethod to address these shortcomings. This new method forrnquantifying the uncertainty of price forecasts honors thernhistorical extremes of oil and gas prices (on a constant dollarrnbasis) along with the maximum positive and negativernhistorical rates of change. To investigate the uncertaintyrnassociated with economic indicators (e.g., net present value,rninvestment efficiency, and internal rate of return), we appliedrnthe HIS method to 23 completed or proposed projects from 12rnoperators. We found the P50 HIS value for these economicrnindicators is comparable to the most-likely value fromrnconventional price forecasts. Across all 23 cases, however, thernHIS method predicted a wider range of economic indicatorrnvalues than conventional forecasts. The HIS method may bernpreferable over conventional methods due to its ability tornquantify more realistic upside and/or downside risk associatedrnwith projects in the upstream petroleum industry.
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