The exploration for, and development of oil and gas reserves is one of the major risk ventures undertaken by industry. This characteristic has been recognized, and industry has been willing to accept the risk involved in order to satisfy our nation's needs for energy resources. The existence of this risk is not unique to the oil and gas industry, but its nature is quite interesting and has, therefore, been the subject of much serious study.
To clarify what we mean by risk and risk analysis, let's look at the definitions. Risk is defined as a possibility of loss; analysis is possibility of loss; analysis is defined as an examination of a complex; therefore, used jointly they would refer to the examination of a complex possibility of loss. Those involved possibility of loss. Those involved in the search for accumulations of hydrocarbons recognize that this search does involve a very complex, and quite possibly loss of time, effort, and investment.
Having recognized the risk and defined risk analysis, the next question is how to apply risk analysis to exploration and development prospects. Prior to discussing this Prior to discussing this application, it is appropriate to examine the need for risk analysis.
The proper management of any company, regardless of size, involves the establishment of, and reaching for, several goals. These goals which include profit, survival, liquidity, and leadership, must be considered in making capital investment decisions. This is true of all companies but is perhaps amplified in the management of smaller firms where less capital is available for investment.