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Base Rate Neglect: A Common Logical Fallacy of Oil and Gas Explorers?


Oil and gas explorers routinely estimate the probability of success (PoS) for their exploration prospects and the amount of petroleum the prospects may contain in the case of success. These assessments are often inaccurate because explorers use judgmental heuristics under the influence of cognitive and motivational biases, and are prone to logical fallacies. Base rate neglect is a logical fallacy displayed when people ignore the base rate information and focus on specific information. I studied data from recent exploration activities of some companies and found that base rate neglect may be a common fallacy among oil and gas explorers. For example, explorers sometimes ignore the recent success rate in the play/basin (base rate) and have a portfolio with average PoS for prospects significantly higher or lower than the base rate would suggest. Explorers also may ignore the field size distribution and creaming curve in the play/basin and have prospects with modelled maximum or mean volumes significantly exceeding the volumes in recent discoveries (base rate). As a result, exploration companies have portfolios that do not deliver on promise or as planned. The base rate neglect fallacy can be corrected through a comprehensive evaluation of previous exploration results in the play/basin and more rigorous exploration assurance.