Hi Bob,
<<It's a loaded question and bound to generate argument.>>
Well, being a very passive individual, I don't intend to argue about "anything" (let alone risk analysis and economics!!) anymore. <gg>
<<We can guestimate a "what if" reward, but how do we calculate risk?>>
Whenever I risk my $$ on an exploration venture I always have a quick look at my estimated "Cost of Failure (COF)" and my estimated "Prize for Success (PFS)". I also attempt to quantify my "Chance of Success (COS)". Then, my "Expected Result (ER)" can be estimated as follows:
ER = COS * PFS - ( 1.0 - COS ) * COF
Then, if ER / (1.0 - COS ) * COF was acceptable, I'd participate and if not, I'd pass.
Large corporations of course get much, much, much more sophisticated in their risk analysis. However, as a very small and private independent, my philosophy towards economic evaluations and risk analysis has always been "KISS". If the reserve estimates and economics of the deal can not be determined to be extremely favorable on a single sheet of paper, then I pass on the deal. With a very finite and limited exploration budget, the play is obviously out of my league and not "sweet" enough for a small player like me to even be considering, if I can not reach the conclusion that it's a great deal on 1 page !!!!
<<Knowing what we do about Cal Canal, is there any way that chances for successful completion of well can be estimated? Secondly, knowing what we do about about the area, is there any method to calculate probability of finding commercial quantities of gas at these depths.>>
Now, here's where the real difficulty starts. I'm not trying to be a smart ass when I ask .... What do we know about Cal Canal ?? And, what do we know about the area ??
But, you will appreciate that what we know is absolutely vital to our definition of COF, PFS, COS and hence to the ER. Thus, unless we know exactly the same thing, we all have a different ER.
Furthermore, a definition of "we" is important to the calculation. Obviously, the ER is different for PYRX (carried interest in the first well) than it is for HTP (capital interest throughout) which in turn is different than it is for KOB (no interest in Cal Canal at all).
If you seriously wish to study this problem further, let me know and tell me more about your background via PM. I'll them try and recommend a suitable book that deals with oil and gas risk analysis. Obviously, there are "entry level" texts and "graduate study level" texts on the subject, so a knowledge of your background is important.
But, I can't just let it drop there. <gg> So, I'll again draw your attention to the above equation for ER. Let's just play with some numbers for a bit and assume that the expected prize for each of ELH and Cal Canal was 3 TCF and that the PFS is $4.5 Billion (CAN). Let's also assume (even though we know it isn't true) that, going into each of these projects, the COF for each project was identical and amounted to the cost of the acquired leases, plus the cost of a little seismic, plus the cost of a dry hole, and let's just say that all amounts to about $18 million (CAN). We're talking deep wildcat exploration here so let's just accept a commonly applied COS of 10% for such a play. With these assumptions we can calculate ER = $433.8MM and ER/COF*(1-COS) = 26.8 (i.e. a 27 bagger on a risked basis !!).
Now, today at CC the COS is still in the order of 10% (It might be very slightly better, say 12%, because some mechanical "risks" are less today then they were before the well spudded.) But, over at ELH it's a completely different story. There, the COS has increased very, very substantially to perhaps something as high as 80% (Whoa, everyone !! I said I'm not going to argue anymore !!) So, today, at ELH the ER = $3.6 Billion, almost 9 times that of CC !!! Quite a difference and of course, JMHOBWDIK.
Kind of easy to understand why institutions get interested at a certain point, isn't it. <gg>
Have a pleasant evening.
Later,
grayhairs |
