Chapter 14: Exploration Available to Purchase

This chapter discusses a generalised approach to the evaluation of exploration opportunities. Individual oil companies may have their own processes and terminology, however.

Oil companies explore for oil, and sometimes they find some and often they don’t. And sometimes they find some, but it isn’t enough oil to justify the usually significant cost of producing it, and so they leave it where it is.

So how do oil companies decide whether to drill an exploration well when they don’t know what the outcome will be? The answer is by using their professional judgment along with some arithmetic.

Petroleum economists can evaluate how much poorer their company will be if it spends money on an exploration well that doesn’t find any oil, and they can evaluate how much richer it should become if it does find some, assuming it is richer, that is. And the company knows what at least it thinks the chances are of each outcome happening.