Typical well logs show substantial variations of formation electrical resistivity over small spatial scales, down to the resolution of the logging tool. Using a plane stratified earth model, we examine the effects of this fine-scale microstructure on scattering of the naturally occurring electromagnetic (EM) waves used in magnetotellurics. We show how 1-D magnetotelluric (MT) data may be viewed as arising statistically from a smoothed effective medium version of the resistivity–depth profile. The difference between the data produced by the true medium and the effective medium is attributable to random scattering noise. This noise is fundamental to magnetotellurics and other diffusive-wave EM exploration methods since it arises from the very small spatial scales that are usually ignored. The noise has unique statistical properties, which we characterize. We show that if scattering is the dominant noise source, a thin layer of increased resistivity at depth can be reliably detected only if the noise statistics are incorporated properly into the detection algorithm. This sets a new fundamental limit on the vertical detection capability of MT data. The theory agrees well with Monte Carlo simulations of MT responses from random resistivity microlayers

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