Basic Principles of Probability
and Statistics
Lecture notes for PET 472
Spring 2010
Prepared by: Thomas W. Engler, Ph.D., P.E
Definitions
Risk Analysis
Assessing probabilities of occurrence for each possible
outcome
Risk Analysis
Probabilities and prob. distributions
Representing judgments about chance
events
Modeling
Geologic, reservoir, drilling
Operations, Economics
Decision criteria
EV, profit, IRR
Present to management for decision
Definitions
Sample Space
Complete set of outcomes
(52 cards)
Outcome
Subset of the sample space
(drawing a 5 of any suit)
Probability
Likelihood of drawing a 5
P(A) = 4/52
Definitions
Equally likely outcomes
Have same probability to occur
Mutually exclusive outcomes
The occurrence of any given outcome excludes the
occurrence of other outcomes
Independent events
The occurrence of one outcome does not influence the
occurrence of another
Conditional probability
The probability of an outcome is dependent upon one or
more events that have previously occurred.
Rules of Operation
Symbol
Definition
Expression
P(A)
Probability of outcome A occurring
P(A+B)
Probability of outcome A and/or B
occurring
P(A+B)=P(A)+P(B)-P(AB)
P(AB)
Probability of A and B occurring
P(AB) = P(A) P(B|A)
P(A|B)
Probability of A given B has
occurred.
Rules of Operation
Addition Theorem
P(A+B)=P(A)+P(B)-P(AB)
Example
12
P
(
A
)
outcome A drawing 4, 5, 6 of any suit
52
outcome B J or Q of any suit
P(A
B)
20
52
P ( B)
P(AB)
A
B
Venn Diagram
Mutually
Exclusive
events
8
52
Rules of Operation
Addition Theorem
P(A+B)=P(A)+P(B)-P(AB)
Example
12
P
(
A
)
outcome A drawing 4, 5, 6 of any suit
52
outcome B drawing a diamond
P(A
B)
22
52
P ( B)
P ( AB)
B
Venn Diagram
13
52
3
52
Rules of Operation
Multiplication Theorem
P(AB)=P(A)P(A|B)
Example
outcome A drawing any jack
P(A )
outcome B drawing a four of hearts P ( B | A )
on the second draw
P(AB)
4
52
1
51
1
663
Sampling without replacement
- observed outcome is not returned
- series of dependent events
4
52
1
51
conditional
Rules of Operation
Multiplication Theorem
P(AB)=P(A)P(B)
Example
outcome A drawing any jack, return
outcome B drawing a four of hearts
on the second draw
P( AB)
4
52
1
52
P(A )
4
52
P ( B)
1
52
1
676
Sampling with replacement
- observed outcome is returned to sample space
- series of independent events
Probability Distributions
A graphical representation of the range and likelihoods of
possible values of a random variable
a variable that can have more
than one possible value, also
known as stochastic or deterministic
Probability density function
f(x), frequency
Random variable
x, random variable
Useful method to describe a range of possible values. Basis
for Monte Carlo Simulation.
Probability Distributions
Range frequency Percent
50 - 80
4
20%
81 - 110
7
35%
111 - 140
5
25%
141 - 170
3
15%
171 - 200
1
5%
20
100%
Divide into intervals
Or bins
40%
35%
30%
25%
20%
15%
10%
5%
0%
50 - 80
81 - 110
111 - 140
Net Pay, feet
141 - 170
171 - 200
Percent
Histogram representation
Of statistical data
frequency
Data
Well No Net pay, ft
1
111
2
81
3
142
4
59
5
109
6
96
7
124
8
139
9
89
10
129
11
104
12
186
13
65
14
95
15
54
16
72
17
167
18
135
19
84
20
154
Frequency distributions
Probability Distributions
Range frequency Percent
50 - 80
4
20%
81 - 110
7
35%
111 - 140
5
25%
141 - 170
3
15%
171 - 200
1
5%
20
100%
Cumulative frequency distributions
minimum
Range
50
80
110
140
170
200
Cumulative
Percent
0%
20%
55%
80%
95%
100%
maximum
Benefits
1. Can easily read probabilities
2. Necessary for Monte Carlo
Simulation
Cumulative percent
100%
80%
60%
40%
20%
0%
50
100
Net Pay, feet
150
200
Parameters of distributions
A parameter that describes central tendency or average of the distribution
Mean, weighted average value of the random variable
Median value of the random variable with equal likelihood above or below
Mode value most likely to occur
A parameter that describes the variability of the distribution
Variance, 2 mean of the squared deviations about the mean
Standard deviation, square root of variancedegree of dispersion of distribution abut
the mean
A
a< b
B
a= b
Parameters of distributions
Computing mean and standard deviation
1. Arithmetic average of discrete sample data set
N
x
i 1
N
N number of equally-probable values
N
(x
i 1
N
17.6
2.87
Core porosity and permeability
Depth
4807.5
4808.5
4809.5
4810.5
4811.5
4812.5
4813.5
4814.5
k,md
2.5
59
221
211
275
384
108
147
,%
17.0
20.7
19.1
20.4
23.3
24.0
23.3
16.1
4815.5
4816.5
4817.5
4818.5
4819.5
4820.5
4821.5
4822.5
4823.5
4824.5
4825.5
4826.5
4827.5
4828.5
4829.5
4830.5
4831.5
4832.5
4833.5
4834.5
4835.5
4836.5
4837.5
4838.5
4839.5
4840.5
4841.5
4842.5
4843.5
4844.5
4845.5
4847.5
4847.5
4847.5
290
170
278
238
167
304
98
191
266
40
260
179
312
272
395
405
275
852
610
406
535
663
597
434
339
216
332
295
882
600
407
479
139
135
17.2
15.3
15.9
18.6
16.2
20.0
16.9
18.1
20.3
15.3
15.1
14.0
15.6
15.5
19.4
17.5
16.4
17.2
15.5
20.2
18.3
19.6
17.7
20.0
16.8
13.3
18.0
16.1
15.1
18.0
15.7
17.8
20.5
8.4
17.6
2.87
Parameters of distributions
Computing mean and standard deviation
2. Values listed as frequencies in groups
n x
i i
n
i
i index to denote number of intervals
n frequency of data points in each interval
x midpoint value of each interval
n (x
i
i
n
i
i
1
2
3
4
5
6
7
8
Porosity
ni
interval frequency
7 x < 10
1
10 x < 12
0
12 x < 14
1
14 x < 16
10
16 x < 18
12
18 x < 20
8
20 x < 22
7
22 x < 25
3
42
Applicable for large data sets
Results are approximate
pi
xi
prob. midpoint
0.024
8.5
0.000
11.0
0.024
13.0
0.238
15.0
0.286
17.0
0.190
19.0
0.167
21.0
0.071
23.5
1.00
mean deviation variance
0.202
85.342
2.032
0.000
45.402
0.000
0.310
22.450
0.535
3.571
7.497
1.785
4.857
0.545
0.156
3.619
1.592
0.303
3.500
10.640
1.773
1.679
33.200
2.371
17.74
8.96
2.993
Parameters of distributions
Computing mean and standard deviation
3. Discrete probability distributions
x
drilling costs probability of range
p x
i i
p (x
i i
midpoint
$M
100.0
105.2
111.5
130.6
136.3
148.2
165.2
168.7
178.5
183.7
190.0
$M
0
0.007
0.040
0.229
0.093
0.225
0.278
0.035
0.066
0.021
0.007
102.6
108.4
121.1
133.5
142.3
156.7
167.0
173.6
181.1
186.9
pi is the probability of occurrence of the xith value
of the random variable
EV
xi*pi
(x i- )2
p(x i)(x i- )
$M
$M
($M) 2
($M) 2
0.7
4.3
27.7
12.4
32.0
43.6
5.8
11.5
3.8
1.3
143.1
0.7
4.5
29.9
12.7
33.3
45.9
5.9
11.8
3.9
1.3
149.9
15.8
1641.3
1208.5
486.8
93.4
0.7
184.6
568.2
929.5
1443.0
1912.9
10.7
48.3
111.5
8.7
0.2
51.3
19.9
61.3
30.3
13.4
355.6
18.9
Parameters of distributions
Computing mean and standard deviation
4. Cumulative frequency distribution
x
midpoint
drilling costs probability of range
$M
100.0
105.2
111.5
130.6
136.3
148.2
165.2
168.7
178.5
183.7
190.0
1.0
Cumulative probability
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
100.0
120.0
140.0
160.0
Drilling Costs, $M
180.0
200.0
$M
0
0.007
0.040
0.229
0.093
0.225
0.278
0.035
0.066
0.021
0.007
102.6
108.4
121.1
133.5
142.3
156.7
167.0
173.6
181.1
186.9
EV
$M
0.7
4.3
27.7
12.4
32.0
43.6
5.8
11.5
3.8
1.3
143.1
xi*pi
$M
0.7
4.5
29.9
12.7
33.3
45.9
5.9
11.8
3.9
1.3
149.9
15.8
(x i- )2
($M)
1641.3
1208.5
486.8
93.4
0.7
184.6
568.2
929.5
1443.0
1912.9
p(x i)(x i- )
($M) 2
10.7
48.3
111.5
8.7
0.2
51.3
19.9
61.3
30.3
13.4
355.6
18.9
Types of distributions
Normal
Lognormal
Uniform
Triangle
Binomial
Multinomial
hypergeometric
Types of distributions
Normal
Characteristics
Cumulative frequency
Define by and
f(x)
Mode=mean=median
Curve is symmetric
x
Cumulative frequency graph is s shaped
Can normalize and obtain area (probability) under
the curve.
Types of distributions
Normal
Given a set of data how do you know whether it
is normally distributed?
Shape of curves
median = mean
Cumulative frequency
Examples: porosity, fractional flow
f(x)
Types of distributions
Lognormal
mode
Characteristics
median
Cumulative frequency
Define by and
f(x)
Modemeanmedian
Curve is asymmetric
x
Cumulative frequency graph exhibits rapid rise
Can transform to normal
variable by y=ln(x)
Types of distributions
Lognormal
Examples:
permeability
thickness
oil recovery (bbls/acre-foot)
field sizes in a play
mode
median
f(x)
Types of distributions
Uniform
Cumulative frequency
Characteristics:
f(x)
all values are equi-probable
specify min and max
allows for uncertainty
used in Monte Carlo simulation
min
max
max
100%
min
Types of distributions
Triangle
Cumulative frequency
Characteristics:
f(x)
all values are equi-probable
specify min and max
allows for uncertainty
used in Monte Carlo simulation
M, most likely
L, low
H, high
max
100%
min
Types of distributions
Triangle
Convert to cumulative frequency plot:
normalize to a 0 to 1 scale:
Define m as:
x'
x L
H L
M L
H L
M, most likely
For x m, cumulative probability is given by:
P( x )
(x )
m
For x > m,
P( x ) 1
f(x)
(1 x )
1 m
L, low
H, high
Types of distributions
Triangle
Example
f(x)
Estimated costs to drill a well vary from a minimum of $100,000
to a maximum of $200,000,with the most probable value at $130,000.
M, 130
Convert the probability distribution to a cumulative
frequency distribution
L, 100
x, random
x'
cumulative
variable
normalized
probability
100
110
120
130
140
150
160
170
180
190
200
1.0
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
0.000
0.033
0.133
0.300
0.486
0.643
0.771
0.871
0.943
0.986
1.000
0.8
Cumulative probability
(drilling costs)
H, 200
0.6
0.4
0.2
0.0
100
120
140
160
Drilling Costs, ($M)
180
200
Types of distributions
Binomial
Describes a stochastic process characterized by:
1.
2.
3.
4.
Only two outcomes can occur
Each trial is an independent event
The probability of each outcomes remains constant over repeated trials
Binomial probability equation is given by:
P(x )
n x
C p (1
x
p)
n x
where
x = number of successes (0 x n)
n = total number of trials
p = probability of success on any given trial
and the combination of n things taken x at a time
C
n
x
n!
x! ( n x )!
Types of distributions
Binomial
Example
Your company proposes to drill 5 wells in a new basin where the chance of
success is 0.15 per well
What is the probability of only one discovery in the five wells drilled?
What is the probability of at least one discovery in the 5-well drilling
program?
1.0
P(x)
discoveries
0
1
2
3
4
5
0.4437
0.3915
0.1382
0.0244
0.0022
0.0001
Cumulative
0.9
P(x)
0.8
0.4437
0.8352
0.9734
0.9978
0.9999
1.0000
0.7
Cumulative
0.6
P(x)
Number of
0.5
0.4
0.3
0.2
0.1
0.0
Number of discoveries
Types of distributions
Multinomial
Describes a stochastic process characterized by:
1.
2.
3.
4.
Any number of discrete outcomes
Each trial is an independent event
The probability of each outcomes remains constant over repeated trials
Multinomial probability equation is given by:
P ( x , x ..., x )
1 2,
r
x x
x
n!
1
2
r
p p
... p
2
r
x ! x !... x ! 1
1 2
r
where
r = number of possible outcomes
x1 = number of times outcome 1 occurs in n trials
x2 = number of times outcome 2 occurs in n trials
xr = number of times outcome r occurs in n trials
n = total number of trials
pr = probability of outcome r on any given trial
Types of distributions
Multinomial
Example
Your company proposes to drill 10 wells in a new basin where the chance
of success is 15% per well
What is the probability of obtaining 7 dry holes, 2 fields in the 1-2 mmbbl
range and 1 field in the 8-12 mmbbl range?
outcome
range
mmbbl
1-2
2-4
4-8
8-12
probability
of dry hole
probability
of
outcome
0.08
0.04
0.02
0.01
0.150
0.850
number of trials (wells) in program
probability of dry holes
probability of 1-2 mmbbl
probability of 2-4 mmbbl
probability of 4-8 mmbbl
probability of 8-12 mmbbl
n=
x1 =
x2 =
x3 =
x4 =
x5 =
10
7
2
0
0
1
0.7%
Types of distributions
Hypergeometric
Describes a stochastic process characterized by:
1.
2.
3.
4.
Any number of discrete outcomes
Each trial is dependent on the previous event (sampling without
replacement)
The probability of each outcomes remains constant over repeated trials
Hypergeometric probability equation for two possible outcomes:
d
P(x )
where
N d
1
1
C C
x
n x
N
C
n
n=number of trials
di = number of successes in the sample space before the n trials
xi = number of successes in n trials
N = total number of elements in the sample space before the n trials
Cab = the number of combinations of a things taken b at a time.
Types of distributions
Hypergeometric
Example
Our company has identified ten seismic anomalies of about equal size in a
new offshore area. In an adjacent area, 30% of the drilled structures were
oil productive.
If we drill 5 wells (test 5 anomalies) what is the probability of two
discoveries?
number_s a mpl e
number_pop
popul a ti on_s
s a mpl e_s
n=
N=
d1 =
x1 =
5
10
3
2
42%