Abstract: Ranking Exploration Opportunities: Some New Approaches
C. R. K. Moore, J. W. Tucker
Traditional yardsticks for ranking exploration ventures are expected net present value, investment efficiency and, to a lesser extent, rate of return. Graphical methods include Value Order plots of risk versus reward. The reward can be expressed either as reserves or monetary value.
Some different approaches to comparing ventures are suggested. These provide more information about the relative quality of opportunities and better illustrate the ability of any venture or program to contribute to preset exploration goals.
Risk capacity, reflecting the break-even odds of success for any venture, provides a useful tool. The amount by which the perceived risk (economic chance factor or ECF) exceeds the inverse of the risk capacity is a good measure of the quality of a venture. This dimensionless fraction is here called Surplus Risk Factor (SRF), or informally "Comfort". A plot of ECF versus 1/Risk Capacity illustrates SRF as the distance from the line along which ECF equals 1/RC. Ventures plotting below the line are unattractive (expected net present value < 0).
Expected value may be restated as the product of Comfort and the present value of the exploration success (NPVd). A useful Value Order plot therefore consists of comfort versus NPVd. The most attractive ventures have the largest numbers on both axes, and so plot towards the top right.
Two other new and useful yardsticks are suggested. Exploration Capital Efficiency is a direct measure of exploration "bang for the buck", being the expected NPV divided by the PV of the failure leg. This is preferred to the usually quoted expected IE which is a complex function of both the quality of the exploration opportunity and the quality of the ensuing development opportunity. Finding costs are frequently used as measures of exploration performance. It is therefore instructive to look at the Predicted Finding Cost, defined by the exploration costs and the expected reserves. This can be compared to the value of the potential success.
All of these parameters are illustrated using a hypothetical international exploration portfolio.
AAPG Search and Discovery Article #90960©1995 AAPG Southwest Section Meeting, Dallas, Texas