There are many ways to approach the valuation of an exploration portfolio. The most appropriate methodology will depend on the scale and complexity of the portfolio as well as time/resource constraints. An expected monetary value (EMV) approach based on success case discounted cash flow analyses is generally the preferred valuation methodology. Various EMV approaches are described and when they might be applicable is discussed. For large complex portfolios the only reliable valuation methodology is a full probabilistic approach built around a Monte Carlo simulation of all possible exploration outcomes. This approach will be illustrated via a detailed case study to back up the EMV discussion.
The expected value of an exploration portfolio should be the mean of all possible values of the portfolio. This is driven by all possible combinations of success and failure of the exploration drill out of the portfolio and the resource uncertainty in those wells that are successful. Short cut approaches are frequently adopted to simplify the valuation process but in many cases the final value, which may be described as the expected value, is in reality not the true expected value. These short cuts often ignore any correlation or dependency between the chances of success for prospects in the portfolio. In undeveloped or immature areas, the commercial and development synergies and dependencies can also have a very significant impact on the ultimate expected value. These short cut approaches do not capture these impacts. In most cases, therefore, the only way to derive an expected value is adopt a full probabilistic approach in a similar manner as routinely employed for resource volumes. A large worked example is presented to highlight the methodology together with some practical ways of dealing with valuation complexities that arise in many portfolios. The end product is not only a single expected value but a distribution of value of the portfolio. The ability to report a range of value similar to the range of resource volumes that are routinely reported is far more informative to decision makers or investors than the current practice of a single expected value.