Swanson Rule help simplify continuous distribution into 3 discrete scenarios

  • The rule of thumb says that the mean of a moderately skewed probability distribution can be approximated by the weighted average of the 10th, 50th, and 90th percentile

    • The weights are typically 0.3, 0.4, and 0.3 respectively and because it is based on percentiles, the rule is robust to outliers.
    • The rule is commonly used in the oil and gas industry for approximating resources volume (and subsequently production) for the purpose of emulating probabilistic evaluation. I don’t believe it’s widely known outside of that sector.
      • Evaluation of the possible range of resources associated with a prospect is a key part of risk taking in hydrocarbon exploration.
    • The challenge of presenting a range of geologically possible models for a range of prospect resources estimates is usually addressed using Swanson's 30-40-30 rule.

  • Swanson's rule defines the mean as 0.3P(10) + 0.4P(50) + 0.3P(90), and provides a good approximation to the mean values for modestly skewed distributions.

    • Applications of the rule to a historical field size distribution and a specific prospect evaluation demonstrate its efficacy in handling routine problems in hydrocarbon exploration, with particular reference to use with the lognormal distribution.

  • However, it assumes a normal distribution – which is almost never the case in oil and gas industry

    • see note on swanson mean is error prone for distribution other than normalswanson mean is error prone for distribution other than normal


      Swanson’s mean (SM) has no theoretical justification for any distribution other than the normal.

      This is despite it is being heavily used within the oil and gas industry to appro...

References

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  • topic:: 00 Engineering Economics00 Engineering Economics
    #MOC / for economics notes with focus on petroleum fiscal and engineering
  • updated:: 2022-09-25 Private or Broken Links
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