Measures of value-added information in hydrocarbon exploration projects

This paper shows that use solely of the expected value for an exploration project does not include any aspects concerning the risk of the project. Three additional measures, involving the variance around the expected value, the volatility, and the cumulative probability of making a distinguish between projects that have the same expected value and which would otherwise be considered equal in worth. In addition, the acquisition (at some cost) of further data or of further studies in attempts to resolve better the project, are both shown to depend on two factors: first, whether the information is to be acquired in order to produce desired changes in the success and failure chances of the project (which such newly acquired data may not end up doing!); second, even if the data do as required, one cannot use the difference between expected values of the project in the absence and presence of the new data to provide an estimate of value-added to the project assessment. Such a determination can arise only when measures of risk and uncertainty are used in addition to expected value because expected value, on its own, does not contain the risk information required. Numerical examples are presented to illustrate these points using decision-tree methods.