A systematic method designed to calculate the expected value of an exploration well is applied to an actual gas prospect in Cook Inlet, Alaska. This system of principles and procedures, herein referred to as the "Capen-Clapp" methodology, evaluates the significant factors that must be considered when a decision is made to drill an exploration well. These factors include geological risk, minimum economic reserve size, reserve size distribution, development costs, rate streams, commodity price, and discount rate.
The method is based on work published in Chapter 5 of The Business of Petroleum Exploration.1 The technique was developed over 20 years ago and has been used extensively for all types of exploration evaluations. Although this technique has been applied to hundreds of prospects, the application of this technique to an actual drill/no-drill decision has not been documented in the public domain due to the proprietary nature of most prospect evaluations. The source of the data is a published prospectus used to promote investment in the venture and therefore serves as a convenient case study to show how the technique is applied.
The discussion of the technique as applied in this case study shows that the Capen-Clapp methodology is thorough, easy to understand, and easy to apply to almost all types of exploration well evaluations. It accounts for all major factors that need to be considered when deciding whether to drill a prospect. It quantifies the risk in terms of one number, the expected value, which can then be used to rank the prospects of an exploration portfolio. This paper will benefit anyone faced with the challenging task of quantifying exploration risk and optimizing the value of exploration expenditures.