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How Oil Price Affects Exploration Strategy: A Case Study

Robert H. Caldwell

To replace production, a company must invest its available funds in acquisitions and/or explore and develop its existing acreage portfolio. Acquisitions and mergers are popular because the costs of finding production through drilling average about $11/bbl, whereas acquisitions cost about half that per-barrel amount. Also, handling an acreage and prospect portfolio may represent on a cost basis about 10% of a company's total assets, and as lease expiry approaches, the acreage must be drilled, farmed out, renewed, or dropped.

Traditionally, companies allocated funds on a prospect-by-prospect basis by analyzing drilling and completion costs, potential reserves, and probability of success. Using these factors, risk-assessed criteria were developed to grade and rank prospects and allocate budgets. However, in today's pricing environment, intuitive decisions must be critically reassessed and budget allocations made on a play level rather than prospect level, depending on a company's perception of future pricing.

Various techniques may be used to evaluate and compare different exploration and development plays and the criteria for optimal allocation of available funds. The techniques establish risk/reward thresholds using drilling and production statistics, and demonstrate how these thresholds change with changing oil price. These techniques are illustrated by case studies of several different plays in the Texas area.

AAPG Search and Discovery Article #91037©1987 AAPG Southwest Section, Dallas, Texas, March 22-24, 1987.