Gary P. Citron¹, Peter R. Rose²

(1) Rose and Associates, LLP, Houston, TX
(2) Rose and Associates, LLP, Austin, TX

ABSTRACT: Skill Pays: How Systematic Probabilistic Risk Analysis Outperforms Intuition

The archived results of an elaborate, realistic exploration training exercise for experienced geotechnical staff, employing integrated principles of probabilistic risk analysis, economic evaluation, and sealed bonus bidding, corroborates findings of recent independent studies of International E&P corporations. Namely, exploration management using integrated, stochastic procedures is more efficient and profitable than more traditional deterministic and intuitive decision-making.

In the exercise, with archived results from 158 multi-disciplined teams in 33 risk analysis classes since 1996, equally qualified teams identify prospects, estimate chance of success, reserves distribution and present value for each prospect, and bid on prospective tracts, using their own cash. 'Success' for each prospect is determined probabilistically, faithful to a 'class solution' for discovery probability. Successful prospects payout the PV of the mean reserves case, scaled consistent with previous investments in seismic and sealed bids. Some teams find oil; some do not. Some teams make money; some do not. Some teams find oil and lose money.

Each team's 'skill' is measured using a consistent, objective procedure, analogous to a vigorous post-well audit of each prospect. Skill is calculated based on application of all principles of probabilistic risk analysis, economics, and bidding strategy, but not on money spent or made, which involves some luck.

Consistent results are: 1) skilled teams spent much less, yet generated greater profits than unskilled teams; 2) generally, skill overcomes bad luck (cost of winning bids for dry blocks was least for skilled teams); and 3) unskilled teams spent the most, resulting in consistent monetary losses.

AAPG Search and Discovery Article #90906©2001 AAPG Annual Convention, Denver, Colorado