Evaluation of Exploratory Drilling Ventures By Statistical Decision Methods
Authors: McCray Arthur W. 
Published: December 2007

American Institute of Mining, Metallurgical, and Petroleum Engineers, Inc.

This paper was prepared for the 43rd Annual Fall Meeting of the Society of Petroleum Engineers of AIME, to be held in Houston, Tex., Sept. 29-Oct. 2, 1968. Permission to copy is restricted to an abstract of not more than 300 words. Illustrations may not be copied. The abstract should contain conspicuous acknowledgment of where and by whom the paper is presented. Publication elsewhere after publication in the JOURNAL paper is presented. Publication elsewhere after publication in the JOURNAL OF PETROLEUM TECHNOLOGY or the SOCIETY OF PETROLEUM ENGINEERS JOURNAL is usually granted upon request to the Editor of the appropriate journal provided agreement to give proper credit is made. provided agreement to give proper credit is made. Discussion of this paper is invited. Three copies of any discussion should be sent to the Society of Petroleum Engineers office. Such discussion may be presented at the above meeting and, with the paper, may be considered for publication in one of the two SPE magazines.

Drilling exploratory wells in the petroleum industry is an economic undertaking petroleum industry is an economic undertaking in which the probability of success of the individual venture is low, but the payoffs from successful wells compensate for the costs of the failures. There is a recent trend toward expressing the possible payoffs in terms of a probability distribution. probability distribution. Appraisal methods were developed that were predicated toward the use of a predetermined predicated toward the use of a predetermined risk factor, as is generally used in statistical decision methods. Cumulative values of groups of exploratory ventures were shown by computer simulation to approximate closely the normal distribution. Solutions developed include determination of the maximum fractional participation in a relatively large venture, participation in a relatively large venture, determination of the maximum appraisal price consistent with financial resources of the economic unit, and determination of the value of information that increases the chance of success. A maximum appraisal price is limited by required expected rate of return when capital resources are very large. However, the appraisal price is dominated by risk where capital resources are not relatively large.

Introduction

The evaluation of petroleum exploratory ventures is concerned with the appraisal of economic undertakings wherein the probability of complete failure of the individual venture is high and the probability of success is low and the magnitude of the occasional success itself is variable. For an individual well, even when it is located with geologic guidance, there is quite a low probability of discovering sufficient quantities of oil to repay the drilling and completion costs. However, where a drilling program consists of a score of such wells, there is often a high probability that the better discoveries will repay the costs of the entire program as well as pay the necessary profits. profits. Several of the methods that have been proposed for evaluate exploratory ventures have proposed for evaluate exploratory ventures have used an expected value, if successful, in combination with some method for handling the relative success ratio. The binomial distribution has been used for describing the distribution of occurrences of successful and unsuccessful trials, and the lognormal distribution has been recognized as adequate for describing the distribution of sizes of resource deposits.