Print this pageA Dozen Esoteric Reasons Why Your Prospect is Probably Worth Less Than You Think
ROSE, PETER R.
Monetary Value of exploratory oil and gas prospects is influenced by many disparate factors, tangible and intangible. Particularly important factors are the three primary components of formal prospect risk analysis: A) prospect reserves, B) probability of prospect success, and C) project profitability, given success.
However, there are many obscure aspects of prospect risk analysis of which most prospectors seem to be unaware, whose inherent effect is to overestimate Expected Present Value of prospects, and thus their Monetary Value.
Some are correctable; others are not:
A. Over-optimistic Prospect Reserves Estimates -- (1) Motivational bias inflating reserves; (2) Estimates deterministic rather than probabilistic; (3) Forecast reserves distribution not log normal; (4) Trap geometry adjustment ignored in volumetric calculation; (5) Structural broadening effect from seismic cross-line dip ignored; and (6) Analog Field-size distribution not limited to recently-discovered fields.
B. Over-optimistic Prospect Probability of Success (P[s]) Estimates -- (1) P[s] too high on high-risk prospects; (2) Geologic P[s] mistaken for Commercial P[s]; and (3) P[s] too high on multiple-objective prospects.
C. Over-optimistic Project Profitability Estimates -- (1) Overbidding caused by the "Winner's Curse"; (2) Reduced profitability caused by the "Theory of Inevitable Disappointment"; and (3) Unrealistic oil price escalation in cash-flow model.