Page 377 - Hydrocarbon Exploration and Production Second Edition

364 Exploration Economics

Probability
of Success
(1 - pos)
(pos)
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

Figure 14.17 Weighing up the risks of exploration.

Even if the EMV of an undrilled prospect (after deducting exploration costs) is
positive, the investor still needs to determine whether the prospect is significant. For
example, would a prospect with an EMV of $50 million be attractive if the
exploration cost is $25 million. Such an opportunity would have a ‘risk cover’ of 2. In
other words, one would spend a guaranteed $25 million to win an expected net prize
of $50 million. This may not be attractive to investors who have other, better
opportunities to pursue. In this case a farm-out may be considered to involve an
investor with a different attitude to such risk.