Probabilistic analysis is commonly used for evaluation of exploratory prospects, where uncertainty exists about the prospect size. A common methodology is to estimate distributions for parameters used in volumetrics, perform stochastic simulation, and utilize discrete estimate(s) from the resulting resource distribution, prepare economic projections for these cases, and estimate a probability of success (POS) based on geoscientists’ judgment about various risk factors. The POS is multiplied times the discounted net present value (NPV) of the success case, while one minus the POS would be multiplied times the NPV of failure. These values are summed to yield the expected value. Alternatively, the POS can be incorporated into the probabilistic analysis, including risk factors in discrete distributions. Incorporating the economic calculation into the probabilistic analysis can capture all possible outcomes, including non-commercial discoveries.

This paper describes a stochastic model for valuation of an exploratory prospect, prepared in an Excel spreadsheet with the @Risk add-in. The model accounts for the U.S. tax implications of the purchase price. The purchase price is eligible for depletion in the event of exploratory and development success, but can be written off in the event of failure. The model allows for two target reservoirs, and the multiple possible outcomes of that exploration scenario. Several examples are presented, and will be compared with the method using only one or three economic cases.

This model was used to prepare an estimate of the net present value of an exploration prospect for income tax purposes. The model enables proper consideration of the multiple possible outcomes. Of key importance in the application for this relatively low POS prospect was the inclusion of the tax benefit of writing off the purchase price in the failure cases. This early write-off can offset the failure costs against other taxable income, which is a substantial economic benefit.

The importance of this work includes a methodology to properly account for the multiple possible outcomes with uncertainties not only in prospect size and productivity, but also in economic factors including oil pricing, exploration and development costs, and operating costs.

You can access this article if you purchase or spend a download.