RISK24 Nov 2021 15:00
Afternoon all...
I have referred to the issue of risk before
But...because many folk here own shares in an E&D company...
yes ‘D’ !
I thought there might be some slight further interest in the subject
This post is not intended as a life’s work...nor is it going to cover geo politics etc
It is really hard focussed on geological risk levels
The following is truly BRUTAL...
Thus may upset those of a squeamish disposition:
Sorry but it is simply inescapable
AND it explains why VERY many folk who buy E&P shares WILL LOSE MONEY...
it is simply the ‘odds/probabilities’...they are all but inescapable
and because so many investors lose money in this market ...they totally MISPRICE the actual risk
My own views and observations...over a LONG period of time...(see inter alia my post of 20 DEC 2011)
Are that the SOLE use of reflective seismic ...GENERALLY...
delivers commercial exploration success rates of ‘ below 10%’
If I told you the actual figures that I have seen over many years, you would self immolate...
BUT...let’s be generous...
let’s assume seismic (I am counting both 2D and 3D) on its own ...
can/does deliver a consistent rate of commercial discovery success of 20%
Then...let’s assume a ‘random outfit’ drills 3 exploration wells with each outcome independent of the other ...at that same 20% level of probability (CoS)
Does anyone invested here please know the answers to the following:
1...The % probability of all three drills being FAILURES?
2...Ditto...two FAILURES (one success)?
3...Ditto one FAILURE ( two successes)?
The answers :
1…51% (80*80*80)...IE worse than an evens toss of the coin!!!!!!!!!!!
2...38%
3...10%
Thus you will see that, based on 20% probability of commercial success,
there would be only a 1% chance of success with all three wells (100 – (51+38+10) )
Now...what might be the answers...
if the probability of success were raised to say 70%?
THE INTERESTING ANSWERS:
1...3%...IE 17 times better than at 20% probability...YES, 17 times better!!!!!!!!!!!
2...19%...
3...44%...
So at 20% CoS on the above three drill example...
There would be a 51% chance of making NO discoveries
BUT... by lifting the probability to 70%... the maths change HUGELY...
Giving only 3% chance of total discovery failure
BUT...
Looking at the other end of the spectrum...(IE the success case):
Using seismic alone, at 20% CoS , the chance of making three discoveries out of three would be only 1%
THAT IS SALUTORY I THINK!
But the effect of lifting the probability rate to 70%
would be to increase the chance of 3 successes out of 3 drills by 34 TIMES
PARDON!
Now
PRD is different in MANY aspects
As we are NOT looking at independent outcomes....far from it
We are not about to embark on an exploration programme...we have already started ...
VERY successfully
TBC
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