are lots of ways to foul up a perfectly good exploratory prospect.
Some are geological or geophysical; others involve misapplications
of engineering principles.
all the possible mistakes that cause prospects to be improperly
evaluated, I think more than half have nothing to do with geotechnology.
Instead they are caused by bad statistics, bad uncertainty concepts,
bad economics, bad decision analysis, bad acquisition practices
and bad portfolio management.
common consequence of all such mistakes is the same — the prospect
is either over-valued or under-valued. Either outcome is a loss
to the investor — and ultimately to you, the prospector.
why you, as a professional geoscientist, need to understand all
those non-geotechnical principles that influence the evaluation
of exploratory ventures: They have the capability to negate all
your hard geotechnical work!
product is that promising new play or drilling prospect, and when
you allow someone else in the decision chain to manipulate your
results, or to misapply non-geotechnical principles — without challenge
— you may be surrendering control of your professional destiny.
why petroleum exploration is such an integrative intellectual undertaking.
Even though we must have technical specialties, we must also be
generalists, capable of understanding and dealing with the interactive
effects of many different non-geologic influences on our prospects
some common non-geotechnical ways your prospect can get fouled up:
- ➤ Bad Statistics:
Using "most likely"
as a valid parameter; using triangular diagrams for lognormal
distributions; using deterministic estimates rather than probabilistic
- ➤ Bad Uncertainty Principles:
ranges that are too narrow; not testing the extremes of parameter
distributions for credibility; ignoring input from JV partners.
- ➤ Bad Economics:
Using DCFROR to rank
prospects; elevating the discount rate as a proxy for risk;
failing to include transfer price when comparing development
projects with exploratory ventures.
- ➤ Bad Decision Analysis:
Failing to consider
optimum working interest (OWI) of important projects; misunderstanding
the sunk-cost nature of all E&P decisions; not otherwise
monetizing rejected ventures; not using decision-tree analysis
to maximize benefit of geotechnology.
- ➤ Bad Acquisition Practices:
In sealed-bid sales,
not discounting project ENPV to guard against "the winner's
curse"; divesting producing properties via private treaty; forgetting
that your goal should always be "adding value" (rather than
winning the block).
- ➤ Bad Portfolio Management:
Not balancing growth
with future cash flows; not holding business unit managers accountable
for BU performance; allowing "favored" projects to bypass systematic
prospect evaluation process.
As a professional
prospector, you can elect to remain naïve about such business practices
— and be a victim — or you can bite the bullet and become knowledgeable
about these important (and interesting) aspects of the exploration
business, and take control of your professional product.
is up to you — but there's no free lunch!
business reading recommendation is The Millionaire Next Door,
by Thomas J. Stanley (1996, Longstreet Press). It's must reading
for every teenager and college student, with essential advice on
how to manage the financial aspects of life.
you'll like it!