Do You Really Understand High Risk/High Reward Exploration?

Marlan Downey
Dallas, TX

People who don't understand the peculiarities of high risk/high reward exploration should avoid such ventures. Most people, most companies, should avoid such ventures. Those rare individuals, those special companies, that have become comfortable with their knowledge of high risk/high reward projects will find little competition in their efforts.

Great companies don't avoid high risk/high reward ventures; instead, they make sure that such ventures are being properly analyzed.

It appears that there are a number of areas of technical and business analysis that deserve especially close review when considering high risk/high reward projects. Among these are: mis-measuring risk, mis-estimating reward, reduced capacity to make correct wildcat evaluation assessments, greatly increased number of exploratory trials to be assured of at least one success, general lack of a proved working hydrocarbon system, and lastly, the inadequacy of many foreign contracts to provide adequate rewards for any high risk venture.

It seems to be little appreciated that our ability to assess risk varies with the level of risk. Low risk ventures are commonly over-risked, while high risk projects are often greatly under-risked. Modern risk assessment groups have succeeded in improving risk assessments in all classes, but high risk ventures are intrinsically difficult to accurately assess.

As well as analyzing risk, it is extremely important to review whether reward estimation is being done properly. Many, perhaps most, foreign contracts are fundamentally biased to prevent the large returns that high risk project economics demand.