Unlike real estate developers, oil companies are conservative.
When I was there:
all projects of ordinary risk (like drilling an oil well in an existing field or a refinery expansion) had to pay 18% at an oil price of $32;
projects of moderate risk (like a step-out, drilling a well adjacent to, but not in existing fields) had to pay 23% at an oil price of $32;
risky projects (like wildcatting, speculative drilling in a new area based only upon the prophetic utterances of geology and geophysics) had to pay 32% at an oil price of $32.
Once everything was said and done, there is a "slippage" between what you hoped and what actually happens. In the final analysis, all of these projects ended up producing a return of about 16.4%. So the slippage on ordinary projects was 1.6%, moderate risk slipped 6.6%, and high risk slipped 15.6% as some failed completely and others produced.
The analysis is the same today except the hurdle oil price is $24 instead of $32. As I said, oil companies are much less optimistic about future oil prices today than they were in 1982.
Also, as interest rates have declined since 1986, the cut-off rates have been brought down by 4% to 14%, 19% and 28%. This should be producing a completed project return of 12.4%, but that part is confidential. But only to a degree, because you can back it out from their return on capital published in the annual report.
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