Methodology for the economic evaluation of exploration projects

Notwithstanding the amount of information on this subject, the economic evaluation of oil exploration projects still has two major drawbacks: (a) the common belief that economics are of no value due to the uncertainties involved, and (b) the fact that the few methodologies that cover all stages of evaluation are not widespread. This paper presents a simple way of visualizing the exploration business. The methodology, commonly used by company managers, is no more than the formulation of disbursements, potential earnings and probabilities, in terms that are typical of gambling: participation cost, success probability and associated bonus. This very simple perception of the problem plainly demonstrates the need to assign a numerical value not only to the project costs but also to its likely outcome and occurrence probabilities. Once the need to evaluate is established, a methodology and a work sequence, successfully applied in many different cases, are proposed. How to solve each of the above stages shall be designed considering the nature, quantity and quality of all available data. The paper presents a discussion of the proposed methodology and a case history.