5 - Similarity, Dependence, and Correlation Considerations for Risk-Adjusted Values and Working Interest

Abstract

This chapter illustrates how similar, dissimilar, and correlated exploration opportunities can be addressed within the framework of both a fixed corporate risk tolerance and a fixed corporate budget, in terms of providing effective working interest to be taken in a given opportunity and the risk-adjusted value to be expected given the constraints of corporate risk tolerance and a fixed budget. In addition, the correlated nature of a single opportunity with respect to a pure fiscal correlation can be provided, as can the dominant variations of uncertainty of inputs in controlling the fluctuations in both risk-adjusted value (RAV) and optimal working interest (OWI). To evaluate which factors need better control, it is important to illustrate how this correlated behavior influences the volatility of the estimated worth of an opportunity, whether the correlation skews the uncertainty more to upside potential or downside loss, and which factors are the most important in causing the variations. The combined interaction of geological correlation and independent fiscal correlation can then be intertwined for any given exploration opportunity. The general conclusion is that attention must be paid to both fiscal and geologic correlations in exploration opportunities of both similar and dissimilar sorts.