Page 375 - Hydrocarbon Exploration and Production Second Edition

362 Exploration Economics

14.8. Exploration Economics

So far, we have discussed the economics of developing discovered fields, and
the sensitivity analysis introduced was concerned with variations in parameters such
as reserves, CAPEX, OPEX, oil price and project timing. In these cases, the risk of
there being no hydrocarbon reserves was not mentioned, since it was assumed that a
discovery had been made, and that there was at least some minimum amount of
recoverable reserves. This section will consider how exploration prospects are
economically evaluated.
In exploration economics, we must consider exploration failure – the possibility
of spending funds with no future returns. A typical worldwide success rate for rank
exploration activity (i.e. exploring in an unknown area) is one commercial
discovery for every 10 wells drilled. Hence an estimate of the reserves resulting from
exploration activity must take into account both the uncertainty in the volume of
recoverable hydrocarbons and the risk of finding hydrocarbons (Figure 14.15).
Recall a typical cumulative probability curve of reserves for an exploration
prospect in which the probability of success (POS) is 30%. The ‘success’ part of the
probability axis can be divided into three equal bands, and the average reserves for
each band is calculated to provide a low, medium and high estimate of reserves, if
there are hydrocarbons present.
From this expectation curve, if there are hydrocarbons present (30% probability),
then the low medium and high estimates of reserves are 20, 48 and 100 MMstb. The
NPV for the prospect for the low, medium and high reserves can be determined by
estimating engineering costs and production forecasts for three cases. This should be

100

80

60 Probability of Failure = 70%
P(x) %

40

20

0
0 20 40 60 80 100 120 140
Reserves (MMstb)
Figure 14.15 Cumulative probability curve for an exploration prospect.