Reward and Uncertainty in Exploration Programs: ABSTRACT

Abstract

The attractiveness of a petroleum exploration program depends on the expected return and the associated risk. Previous analyses of drilling programs have dealt with particular aspects of uncertainty. The variable--size of reservoirs--has received the most attention; various skewed probability density functions have proved to be consistent with empirical observation. Estimates of the expected value and variance of this variable have been interpreted casually as measures of the economic reward and the degree of risk, respectively, of specific exploration programs. The size of reservoir found, however, is only one aspect of the uncertainty in exploratory drilling. Among the other variables which have an important bearing on the economics of the program are the probability of making a discovery, the depth of the producing formation, and productivity of the wells. Possible stochastic descriptions of the most significant variables, and studies of their combined effects on the attractiveness of a particular venture, have proved to be very instructive. End_of_Article - Last_Page 2472------------