Professional Documents
Culture Documents
Petroleum Exploration
• Decision Analysis
– A comprehensive approach to evaluate and compare multiple
options considering both elements of risk and uncertainty
• Risk
– The probability of different outcomes from an event
Discovery
Test well
Dry hole
• Uncertainty
– Statistical variations of a variable; e.g., oil price, oil-in-place, aka
“stochastic”
Expected Value Definitions
• Expected Value
– Probability weighted value of all possible outcomes
n
EV P(outcome )i * NPV (outcome )i
i 1
Expected Value Example 1
Decision Options
Drill Farmout
outcome P(outcome) Conditional Expected Conditional Expected
value($) value of value($) value of
outcome($) outcome($)
Dry hole 0.4 -200,000 - 80,000 0 0
EV = +280,000 +30,000
Expected Value Definitions
• EV Decision Rule
– When choosing among several mutually exclusive decision
alternatives, select the alternative with the greatest expected
value.
• Repeated trial clause
– From the example, if you drill one well can you have an outcome
of $280,000?
– What about if you drill 100 wells?
Management questions
1. What is the maximum Devon should pay for the
leasehold rights?
Decision Options
Possible Drill with 40% WI Farm out – retain Penalty clause
outcomes ($) ORRI on 256 net with 40% backin
acres ($) option ($)
Dry hole -28,000 0 0
Possible P(O) NPV ($) EV ($) NPV ($) EV ($) NPV ($) EV ($)
outcomes
Dry hole 0.35 -28,000 - 9,800 0 0 0 0
The expected value of a decision represents the average NPV gain that would
be realized over a series of repeated trials in excess of a rate of return equal to
the discount rate.
That is, the maximum economic amount we could offer for the leases (and still
have earnings of the discount rate) is equal to the expected value.
$16,650
$65 / acre
256 acres
Expected Value Example 2
drill
30000
EV ($), exclusive of lease costs
1.00
1.00
1.00
Dry hole costs = $70,000 Dry hole costs = $28,000
Completed well costs = $100,000 Completed well costs = $40,000
At 40% WI