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Exploration: the need for optimism, and how to temper it

Anyone who’s spent a day in the oil and gas industry knows the importance of thorough, objective evaluation. When an opportunity requires millions of dollars in investment costs, you can’t afford to commit to an opportunity unless it’s underpinned by evidence-based  subsurface assessments and ironclad field development plans that have passed through assurance. All uncertainty and risk must be clearly and objectively described.

But explorers – those whose task is to find oil and gas in remote basins – often have a mindset that’s completely unique in the industry. They’re more likely to roll the dice without knowing the odds, they view uncertainty differently, and above all, they’re cautiously optimistic about the opportunities they discover.

 

Why explorers need to be optimistic about oil and gas

To be an explorer, you need to have a certain level of optimism at your core. Explorers need to be able to look at unknown places and not only wonder what might be there but err on the side of believing something valuable could be there. Otherwise no one would ever look any closer, fewer new major opportunities would ever be discovered, and the oil and gas industry would be somewhat more stagnant.

 

How an explorer’s optimism can lead them astray

Of course, to do exploration right, you don’t just need an eye for opportunities, you need to know you’re recommending the right opportunities. That’s of course true for any potential reservoir development, but especially so when optimistic expectations can so easily cloud decisions.

Explorers aren’t always optimistic, but that can lead to problems too. When a project is low risk we tend to over risk them because we don’t want to look foolish. If an explorer says there’s a 90% chance of success and the prospect fails, it’s risky for them personally, so they’re more likely to say there’s an 80% chance of success.

However, if a big opportunity has a 25% chance of success, and the company is only progressing projects with a minimum 33% chance of success, an explorer might anchor their evaluation to that waterline. This is rarely a deliberate tweaking of numbers but simply the way our minds work unconsciously. Uncertainty is difficult to map at the best of times, data can reveal what you want to see, and it’s easy for an optimistic explorer to frame a likely failure as an “it-might-just-work” opportunity.

 

How an explorer’s drive can lead them astray

Then there’s the lure of the Big Bump. Explorers have a natural drive to find the biggest field in the world and make their mark, but that can lead them to forget that large opportunities and high value opportunities aren’t always one and the same.

You might discover a vast, untapped opportunity with enormous potential, but if you discover later on that the reservoir rock is difficult to work with, the cost of resourcing the development can easily eat into the profitability of the field.

On the other hand, exploring around existing oil fields might yield smaller prospects on paper, but you’ll have a much better understanding of what the reservoir there looks like, and you can better judge what resources the development will need and how valuable it can really be. This infrastructure led exploration, if successful, can result in significant value generation due to low development costs and rapid turnaround from discovery to production.

 

Broad evidence is at the root of ranking opportunities

All of this comes down to understanding the risk and uncertainty of a prospect. When explorers are excited about finding a new opportunity, they can often think that the model they’ve created is the only one that needs to be consulted, or they’ll only compare it to similar opportunities that have worked in the past.

But if you’re going to have a balanced, objective view of the opportunity – one that helps leaders make decisions with confidence – you need to consult other models and examples that didn’t meet expectations. You need to be sure that all explorers in the firm are following a common, consistent process regardless of the opportunity, and that models aren’t being influenced by irrelevant data simply because it supports what people want to see.

Explorers may also have a tendency to only focus on a small part of the land – usually the best area where previous hydrocarbons have been found. But doing so is like trying to understand the UK’s transport network by only looking at London. You might get some things right – the presence of trains and buses, for example – but their distribution in central London is going to be completely different to rural Cumbria.

Geology is ultimately a bigger picture game. Explorers have to take a broader view when they’re looking for opportunities, even if – or especially if – that broader view contradicts what they’re expecting to find. It’s for this reason the good exploration starts at a regional or basin scale, often over many thousands of square kilometres, and gradually focuses on prospective stratigraphic layers, or play fairways, before ultimately defining drillable prospects with objectively and consistently defined chance of success.

 

Exploration is an experience game

When you’re trying to rein in optimism and the bias that is inherent in any evaluation of uncertainty, it often comes down to experience.

The best explorers, those who have achieved technical mastery, are the ones who have seen every kind of rock and hydrocarbon basin, and who have gained an intuition for what works and what doesn’t. And in many ways, the best lessons an explorer can learn aren’t from the opportunities that succeed without issue, but from those that fall short of an optimistic evaluation.

At Rockflow, our team has seen the exploration process carried out countless times across different opportunities and organisations, and the experience we gain from each project feeds into the next.

For instance, we’ve seen a situation in which a number of exploration and appraisal wells were drilled to assess the opportunity, and the findings were reviewed and signed off by the whole organisation. But when it came time to develop the project, the reservoirs didn’t connect as well as expected – in fact it was a disaster.

Despite all the tests that had been performed, a key element of the geology had been overlooked. And although it was a painful experience, it was also a valuable lesson.

Since then, we’ve seen a number of basins that looked remarkably similar. And we’ve seen the same kinds of organisations ask us to review their estimates of volumes (which were too high) and risk (which was too low). Because of their experience, our own explorers could see these projects weren’t going to work and why – and we were able to save these companies from wasting millions of dollars on a poor investments.

To learn more about how Rockflow can help with matters of assurance and evaluation, read our article on the difference between evidence and assumptions, or head over to our Technical Excellence page.

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