The Case for High Risk Exploration: Do It Right,…Or Not at All!*
Marlan W Downey1
Search and Discovery Article #70018
Posted August 1, 2006
*Oral presentation at AAPG Annual Convention, Houston, Texas, April 9-12, 2006: AAPG Forum: Winning the Oil End Game: The Future of Hydrocarbon Resources in Our Global Economy, April, 12, 2006
1Dallas, Texas ([email protected])
If we can agree that major success in exploration requires ability to explore efficiently in all types of exploration plays, not just the low risk, not just the simple, not only conventional plays;… then we need to be concerned that few people know how to efficiently explore in higher risk settings.
People who don’t understand the peculiarities of high risk/high reward exploration should avoid such ventures. Most people, most companies, currently avoid such ventures.
Those rare individuals, those special companies, that have become comfortable with their knowledge of high risk/high reward projects will find little competition in their efforts.
Great companies don’t avoid high risk/high reward ventures; instead, they make special efforts to insure that such ventures are being properly analyzed.
It appears that there are a number of areas of technical and business analysis that deserve especially close review when considering high risk/high reward projects. Among these are:
geologic risk assessment,
proper reward estimation,
recognition of the large number of trials to establish success,
increased difficulty in wildcat evaluation,
a frequent lack of a proven petroleum system, and
the inadequacy of many foreign contracts to provide adequate rewards for any high risk venture.
Geologic Risk Assessment
It seems to be little appreciated that our ability to assess risk varies inversely with the level of risk. We are likely to find that individual low risk ventures are commonly over-risked, while high risk projects are often greatly under-risked.
Modern risk assessment groups have succeeded in improving risk assessments in all classes, but high risk ventures are intrinsically difficult to accurately assess. We should expect high risk ventures to have substantial uncertainties in their Ps estimations.
High Risk Ventures Require a Large Number of Trials to Assure Success
Confidence in risk estimation is especially difficult for high risk ventures, since a great number of failures must be endurable before success can be assured.
Probabilities of success only reflect real outcomes when large numbers of trials are undertaken. And the meaning of “large numbers of trials” is defined by the Ps.
Remember, if the Ps of a venture is .5 (a coin flip); it will take five trials before you may be certain (95% certain) of at least one success. For a high risk venture of, say, Ps .1, you would need to endure about 25 trials to be certain of at least one success!
Does your company have the confidence, capital, and persistence to pursue high risk ventures?
Properly Estimating Reward
As well as analyzing risk, it is extremely important to review whether reward estimation is being done properly. Constraining the rampant enthusiasm of explorers is difficult. While most groups have learned to systematically assess risk, fewer exploration groups test guesses of project reward against history and field size probabilities.
In my view, the best proof that an exploration team is properly estimating risk and reward is given by the “Report Card”. The “Report Card” is a continuously updated cumulative plot of risk discounted expectation volumes compared to the graph of actual discovery volumes, entered on a wildcat by wildcat basis. Updating and displaying the “Report Card” allows management to retain confidence in the conduct of the exploratory program.
Difficulties with Recognizing Success in High Risk Provinces
In areas of historical production, with well-known reservoirs and petrophysical characteristics, success or failure can confidently be determined with a single wildcat. In high risk provinces, it is generally more difficult to obtain a reliable determination of the productive capability of a wildcat. Indeed, work by Bob Sneider pointed out that in the past twenty years, a typical 500 MMBOE accumulation would have been drilled by three wildcats, on average, before being recognized as a field! Robertson, in this session (Search and Discovery, 2006), has described the sequential series of business and technical decisions that were required to transform a wildcat in a high risk province in Indonesia into a world class high reward discovery. A number of wildcats had already penetrated the accumulation and would have been scored as non-commercial failures, until improved analyses by the Arco team determined that a 20 TCF field could be recognized.
Contractual Difficulties to Large Rewards
Many, perhaps most, foreign contracts are fundamentally biased to prevent the large returns that high risk project economics demand. Even in those countries where the terms appear to allow very high returns for very high risks, it is almost certain that those favorable terms will be unilaterally altered, given success.
I know of NO cases where major success in high reward foreign projects has not been followed by unilateral revision of terms.
Petroleum Systems in High Risk Settings
The most common technical problem for high risk exploration ventures is the lack of a petroleum system. This problem is often only superficially understood, and wishful thinking and improper evaluation of hydrocarbon shows may delude explorationists as to true risk.
A working petroleum petroleum system is demonstrated by production of hydrocarbons to a borehole.
A working petroleum system is NOT demonstrated by surface seeps, by hydrocarbon shows from mudlogs, by trip gas, by hydrocarbon stains on cuttings or cores, or by surface geochemical anomalies. Such hydrocarbon shows can be important clues, but they do not prove the presence of a petroleum system.
Are high risk/high reward ventures really different, in a non-linear way, from lower risk/modest reward ventures?
I think they are, and that high risk projects require far more knowledgeable technical examination and business review for success.
….And the best way to pursue high risk/high reward exploration ventures?
Select ONLY that class of high risk ventures where early, low cost technical work might provide an option to dramatically improve the probability of success.