A Probabilistic Approach to Valuing Different Equity Interest in Multi Pay Exploration Prospects (31st IPA Conference, May 2007)

May 12, 2007 • Tell FriendsPrinter Friendly


The high costs and risks associated with many oil and gas exploration projects often cause companies to seek partners to share those costs and risks before embarking on major expenditure programs.

A previous study of farm out analysis for block X in Medco has been done using deterministic model (Kristiono, 2005). This further study was conducted to optimize farm-out analysis using probabilistic model. A risked economic evaluation of a two pay zone prospect i.e. Zone A and B in that block illustrates how probabilistic simulation modeling and deterministic valuation and risk analysis techniques combine to provide useful insight to economic evaluation of a farm out opportunity.

One of the significant advantages of probabilistic methods is their ability to quantify downside risk in more detail than deterministic calculations. Analysis of the negative values in the calculated EMV distributions from the probabilistic method can yield significant insight into the downside risk associated with a prospect.

This paper concluded that, there do appear to be farm-out terms that could be attractive to both parties i.e. Farminee pays between 60% and 70% of exploration well costs to earn a 50% working interest. However, If Medco is subject to capital constraints and under timer pressure to drill an obligation well it may accept farm-in terms with little or no promote to limit its financial exposure and down side risk.
Alternatively, the farminee may be prepared to accept less than optimal farm-in terms on this prospect in exchange for an interest in the upside potential of other possible prospects in the contract.

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