Discovery Chance of Success – What are the Odds of Another?

David Finlayson, Chairman of WBC, comments on interesting analysis by Will Forbes of Edison that looks into the chance of success in exploration.  The original analysis, titled “Made a discovery? What are the odds of another?” can be found here.

Will’s thoughtful paper compares drilling outcomes of follow up wells to initial drilling on blocks and acreage – using the transparent and accessible Norwegian Continental shelf well data base from the NPD. He then asks questions of other drilling campaigns in other basins and how these results should affect company valuation

Thinking about the Norwegian shelf, my first reaction on seeing the chart was that this was reflecting not only the increasing maturity of the basin but more fundamentally reflected the improvements in seismic coverage and quality over the period. First wells today are being drilled with a lot more confidence than back in 1975.  I know…I was there! We were placing exploration wells based on 2D data with a 2-km grid spacing. So, after a ‘failure’ there would infill seismic, perhaps some re-processing. Then a new interpretation – still constrained by data quality and density. However, we often found encouragement to try again.

Basin maturity plays a key role in how confident you are that the ‘statistics’ are pointing to the truth: with maturity generally comes better data. But nowadays, most exploration programmes start with dense seismic, most likely 3D data.

Frontier basins are those characterized by few (if any) wells and few (if any)direct indications of hydrocarbons; if there are no wells, then there are NO statistics. Explorers will be using analogies and some will go through the hoops of assessing source, seal, reservoir, trap, and migration. Some will derive a precise 1:14 chance of success, when really the chance of success is unquantifiable.

Partly-explored basins will have sufficient wells to narrow down the criteria for a working petroleum system. There may be discoveries or commercially exploited fields established and a history of reserves growth established (A creaming curve) . This may be commonly manifested as a series of steps which relate to initial exploration, new play discovery, application of new technology or simply increased seismic and drilling. Historical statistical data can support forward-looking judgments but the chance of commercial success is only partly quantifiable. There is still plenty of room for surprises.

Mature basins with multiple discoveries and many exploration wells are typically characterized a slowing reserve growth through exploration is levelling off. Exploration play fairways are well-defined and historical statistical data can (usually) accurately predict future success rates and commercial outcomes

To me the basin ‘address’ has always been an important aspect in valuation: each basin has a unique set of characteristics on which influences the perception of value, even before you see the first prospect.  The same geologic story, drilling history and expectation in say the central North Sea will carry a ‘Value’ premium to the same story of say Indonesia or Malaysia. Investors will add a risk premium for the location taking Above ground factors into account.  That includes the operating environment, political and fiscal risk. And the cost of doing business, availability of infrastructure and multiple route to monetisation.

So it is not all down to the concept of pure technical risk and statistics . However you would rather be drilling somewhere with the sense that the ‘facts’ are telling you the truth!

Made a discovery? What are the odds of another?

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