Foul Ups? Let Us Count the Ways

Business Side of Geology

There are lots of ways to foul up a perfectly good exploratory prospect. Some are geological or geophysical; others involve misapplications of engineering principles.

But of 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.

But the 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.

That's 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!

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There are lots of ways to foul up a perfectly good exploratory prospect. Some are geological or geophysical; others involve misapplications of engineering principles.

But of 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.

But the 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.

That's 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!

Your professional 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.

That's 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 and plays.


Here are 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 ranges.

➤  Bad Uncertainty Principles:

Setting predictive 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.

The choice is up to you — but there's no free lunch!


This month's 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.

Read it, you'll like it!

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