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The Prospector Myth is the petroleum explorationist's version of the Hero Journey. We are informed and inspired by the image of the courageous lone prospector who struggles against Mother Nature, financial hardships, skeptical associates, and repeated rejection by investors, before finally succeeding through persistence, faith, and luck, to achieve vindication, wealth, and fame. Most of us know personally—or know of— one or more such individuals. We call them “wildcatters,” “oil finders,” “visionaries,” and other dramatic names reflecting the respect they are accorded in our industry.

The “Prospector Myth” versus Systematic Exploration: Dealing with the Dilemma


The Prospector Myth is the petroleum explorationist's version of the Hero Journey. We are informed and inspired by the image of the courageous lone prospector who struggles against Mother Nature, financial hardships, skeptical associates, and repeated rejection by investors, before finally succeeding through persistence, faith, and luck, to achieve vindication, wealth, and fame. Most of us know personally—or know of— one or more such individuals. We call them “wildcatters,” “oil finders,” “visionaries,” and other dramatic names reflecting the respect they are accorded in our industry.

Uncertainty, Intuition, and Overoptimism

Geoscientists select (or are assigned) basins or trends in which to explore for petroleum. Such endeavors are characterized by daunting uncertainty, which can be reduced (but not eliminated) through costly geotechnology and seasoned judgment. Explorationists must peer through Nature's fuzzy lenses, searching for cryptic clues. They must invest intense physical and intellectual energy, over extended periods, patching together possible portraits of the subsurface, then selling and defending the proposed risk ventures that arise from their imagination and labor. Because exploration is dominated by subjectivity and uncertainty, it invites the exercise of intuition. And, of course, when geotechnical intuition is rewarded by exploration success, the prospector's ego is affirmed and even extolled. But most exploration projects fail, so most seasoned prospectors have learned to live with repeated failure. It is no wonder that petroleum exploration cherishes the Prospector Myth.

It is also not surprising that most explorationists are overly optimistic about their basins, trends, and prospects. After all, such dedicated prospectors could hardly be expected to be rigorously objective about their prospects! The Prospector Myth is the primary reason why explorationists persistently overestimate the reserves potential of their prospects.

But the process by which oil and gas prospects are translated into economic ventures also contributes to overoptimism. In the early days of petroleum explo-ration—the glory days—many prospectors were indeed individuals or small firms, and their investors were private third-party investors and corporations, more or less knowledgeable about petroleum exploration. Caveat emptor was the prevailing ethic because the subscribing sponsors were expected to be able to judge the true merit of each deal. So the operative criterion for success was to sell the deal, to get the well drilled. And that pattern still today characterizes many smaller firms that generate prospects and turn them over to larger companies to be drilled. “Have faith—success will eventuate, given persistence and sufficient trials: one real success will carry a dozen failures.” Unfortunately, the same value system still operates in some offices—even throughout entire companies— even though the professional employees of these publicly owned corporations are selling their deals to their own managements (and thus their own stockholders). Because of our sympathy for the Prospector Myth, we tend to dismiss more benign examples of this as motivational bias. More flagrant examples, however, we are bound to label as conflicts of interest.

Times Change

The increasing employment of geoscientists and the rise of large, publicly held corporations after World War II gradually began putting a crimp in the freewheeling presentation of oil and gas prospects. Scientific objectivity, professional ethics, the declining petroleum resource base, and the need to deliver promised exploration performance together collided with the Prospector Myth and salesmanship. Even so, influenced by the Prospector Myth, the world petroleum industry wasted a lot of money on exploration in the late 1970s to early 1990s. Shell, Mobil, and Amoco independently reported that exploration for high-risk, high-reserves targets in this period destroyed value, rather than creating it. While we kept looking for elephants, sizes of discoveries were steadily diminishing (Figure 1). We lost credibility with directors; we lost money for stockholders. By the 1990s the industry was becoming global in scope and needed to become much more efficient. To be sure, improvements in seismic technology and drilling and completion methods improved our success ratios substantially. But consistent, objective, technically sound procedures for assessing prospects also led to the adoption of systematic prospect risk analysis procedures. The recognition of the lognormal distribution as the prevailing natural pattern of oil and gas field-reserves distribution (Figure 51), together with the development of refined methods of estimating geo-technical uncertainties, began to constrain the optimistic exuberances that had been indulged by intuition and the Prospector Myth.

Figure 51

Lognormality—two modes of portrayal.

Figure 51

Lognormality—two modes of portrayal.

Today, most modern petroleum exploration is carried out by multidisciplinary geotechnical teams, not individual prospectors. Most substantial companies consider an inventory of many candidate prospects, from which they select their annual drilling portfolio, which comprises only those prospects that together maximize economic value consistent with company goals and risk tolerance. We try to manage exploration by managing the exploration portfolio. With this concept comes the realization that, if portfolio management is to succeed, each prospect must be assessed consistently and objectively. The inherent uncertainties can be dealt with via improved geotechnology and with geostatistics. What kills the portfolio is bias, which overvalues some prospects so that the value of the portfolio is not optimized (Figures 15 and 16). The stockholder is shortchanged by the Prospector Myth. Systematic portfolio management is more effective than intuitive prospect selection—or “cherry-picking.” This is a blow to the egos of most prospectors, as well as many managers.

Imperfect Remedies

Since the 1950s, our industry has tried to reconcile the dilemma in various ways. A common approach— thankfully now diminishing—pitted geoscientists against engineers, tacitly accepting and reinforcing the proposition that geologists were expected to be overly optimistic, which required engineers to be correspondingly overly conservative. Another remedy was to artificially inflate economic criteria—notably the discount rate—under the mistaken notion that “those prospects that still have positive expected monetary values (EMVs) under inflated discount rates must be better prospects than those that don't.” A third technique was to employ hidden hurdles (p. 123) in the higher levels of the decision chain: managers at headquarters routinely cut prospect values by half (or more), based on their observations of past exploration overoptimism. In response, explorationists became adept at sniffing out such arbitrary screening measures and devising ingenious ways to generate geotechnical numbers that were adequate to get their prospects drilled. In particular, many explorationists in top management exercised their own version of the Prospector Myth by applying their privileged intuition—and egos—to the prospect selection process. Understand-ably, such managers found it difficult to surrender the intuitive style that had advanced their successful exploration careers to date, in favor of probabilistic expressions and reliance on systematic prospect selection.

Figure 52

Exploration reality.

Figure 52

Exploration reality.

Since almost no one kept systematic records documenting actual prospect results (compared against geotechnical predictions), everyone in the chain— prospectors, engineers, local managers, and senior executives—usually did not have to confront the consequences of systematic bias. The urgency of drilling the next well far outweighed the value of objectively and purposefully assessing our mistakes from the last well. We were too busy drowning to take time to improve our swimming ability. Instead we put our greater reliance on geotechnology (especially seismic surveys), which often did reduce the impact of large uncertainties regarding prospect reserves and present value and the discouragingly low chances of prospect economic success. But most of us stead-fastly refused to address the glaring problem of bias (Figures 15 and 16).

Response of Systematic Exploration

Companies eventually began to employ institutionalized systematic procedures for continuous improvement, which required objective comparison of geotechnical predictions versus actual outcomes. Geo-scientists began to learn from their mistakes and to calibrate their predictions. Corporate explorers began to employ a different criterion for success: adding value versus getting the prospect drilled. The need for objectivity generated a long-overdue appeal for geotechnical professionalism as a requisite to objectively identifying and selecting those projects that together maximize the value of the portfolio, consistent with the organization's strategies and risk tolerance. Geoscien-tists could take pride in being professional.

Today, some prospectors mourn the diminished influence of the Prospector Myth, even though the log-normal distribution still allows them to dream (Figure 52). But increasingly, astute explorationists are recog-nizing the necessity for heightened exploration efficiency as the global resource base continues to shrink. Systematic risk analysis, professional objectivity, and performance tracking must go hand-in-hand with sophisticated geotechnical methods.

But the Prospector Myth still lingers, and properly so if it can inspire our courage, persistence, and imagination in petroleum exploration, without biasing portfolio selection. All too often, however, the entrenched intuitive preferences of management as well as some geosci-entists—and inappropriate concern about preserving budget share—warp exploration performance through bias or double-risking. The ongoing challenge for geo-technical professionals is to harness the energy of the Prospector Myth without compromising the scientific integrity and business objectivity now required for successful management of the exploration portfolio.

Characteristic Corporate Process for Exploration Risk Analysis

Most organizations have settled on using a consistent process to assess all exploration prospects and plays for management evaluation and decision. Procedures, underlying concepts and principles, and helpful suggestions are carefully organized into handbooks or manuals, which in turn relate to and explain computer programs or flow sheets by which geotechnical staff in all office locations can readily, systematically, and consistently carry out risk analysis of all exploration ventures. Some companies have developed their own risk analysis software, using various forms of Lotus® or Excel® spreadsheets and risking software such as “@Risk”® or “Crystal Ball.”® Other companies have licensed customized software from several different vendors or consulting groups. A useful byproduct of such standardized approaches is that all geotechnical predictions and forecasts are preserved, thus facilitating subsequent project review for purposes of performance analysis. Such data are rolled up and compiled by central staff to facilitate portfolio selection and analysis and to analyze overall company performance.

Prospects are identified by name, location, trend, reservoir, objectives, originator, and the like. Then interactive risk analysis software guides the explo-rationist(s) through the process of developing the prospect-reserves distribution, honoring the lognor-mal distribution and expressing projected prospect ultimate recovery probabilistically, as P10%, P50%, P90%, and mean reserves. Many firms have incorporated interactive graphics capabilities that allow the reserves distributions to be depicted in either frequency and/or cumulative probability format and to be shifted at will. Reality checks help common errors to be identified throughout the estimating process. Many programs contain analog field data, providing a perspective against which the prospect can be viewed. The software promotes trial fitting and testing of data and early estimates, resulting in repeated iterations and reiterations of data until best-fit distributions emerge and are finalized.

In a detached procedure, cash-flow models utilizing the differing probabilistic reserves level (and ancillary well numbers, initial production rates and percentage decline curves, costs, and contract terms), are used to calculate the present value of different reserves outcomes. Uncertainties such as initial production rates, percentage decline rates, and wellhead prices are variables within the cash-flow models. Based on these several reserves cases, (P10%, P50%, P90%, and the mean), minimum commercial and economic field sizes are derived. These figures are used in connection with the prospect-reserves distribution to estimate the chances of minimum commercial and minimum economic field sizes (given a discovery).

Accepted economic measures, such as net present value (calculated at the corporate discount rate), dis-counted cash-flow rate of return, investment efficiency, and growth rate of return, are calculated for each reserves case.

The next step is to estimate the chances of success, utilizing a consistent set of well-defined geologic chance factors. Again, flow sheets or software takes the explo-rationist(s) through the estimation of geologic chance in a step-by-step manner, with useful questions, reality checks, and questioned errors appearing throughout the process, thus encouraging iteration and reiteration of estimated values before settling on final forecasts.

Once sound estimates of prospect reserves and chance have been made, the next step is the generation of risked prospect parameters, such as expected net present value, risked investment efficiency, and prospect optimum working interest, by which prospects under consideration may be ranked for possible inclusion in the company's current prospect portfolio. These values are used to help determine appropriate bid levels for acquisition, keyed to the anticipated methods for offering and sale.

Ordinarily, portfolio selection is carried out as a separate computerized procedure that may employ the efficient frontier concept, using preselected corporate values for acceptable portfolio risk (variance of economic results) versus portfolio rate of return. Some portfolio management systems consider and balance growth with timing of cash flows. Probabilistic expression of portfolio results allows senior management to assess and evaluate various portfolio tradeoffs before settling on a final selection of prospects to constitute the final portfolio. However, it cannot be overemphasized that meaningful portfolio analysis absolutely depends on responsible and unbiased estimates of prospect reserves and the chance of success.

Another distinct computer module or standardized activity is ordinarily devoted to performance analysis. Predictions of prospect parameters are routinely entered and preserved, keyed to the parent play, location, objective formation, and prospect name. Results of exploratory drilling are then entered into the inventory to be used in compiling and analyzing the predictive capabilities of the geotechnical staff and the overall exploration performance. Frequent feedback and discussion of specific learnings and remedies between portfolio management and exploration teams allows steady improvement of professional geotechnical performance.

Play Analysis

Some exploration companies have also formalized procedures for conducting risk analysis and economic evaluations of new exploration plays, along comparable lines to the procedures outlined in Chapter 6's section on Play Analysis. Many firms have software or flow sheets that systematize and standardize the process of exploration play analysis. A limited but useful literature outlines many of the common concepts, procedures, and pitfalls in risk analysis of exploration plays: Baker (1988); Baker, Gehman, James, and White (1986); Brown and Rose (2000); Jones and Smith (1983); Rose (1995, 1996a, and 1996b); and White (1988, 1992, and 1993).

Implementation of Risk Analysis in Exploration Organizations


Exploration firms that have been utilizing a consistent system for risk analysis of all ventures in their exploration program already know that it improves economic performance by:

  1. identifying and deleting prospects unlikely to be profitable;

  2. promoting consistency in allocation of capital among competing ventures, according to merit;

  3. improving cost effectiveness and manpower utilization by highlighting those emerging explo-ration leads having the greatest profit potential;

  4. forecasting future results of current prospect inventories and delivering on those forecasts; and

  5. encouraging systematic improvement of exploration predictive performance.

Over the past 10 years, many domestic and international companies have made the purposeful decision to set up consistent, companywide exploration risk analysis procedures. When they take this step, it inevitably changes the corporate culture, operating values and tactics, and reward system. Adoption of exploration risk analysis goes hand-in-hand with reorganization (Rose, 1994).

Each company that undertakes this move usually encounters about 9 to 18 months of turmoil, during which time it believes itself to be plowing new ground. In fact, however, there are characteristic—almost expectable—organizational behaviors and responses that tend to recur among all firms. Prior awareness of such patterns can help make the transition much smoother and more efficient.

Fundamental Requirements for Implementation Success

In the end, five fundamental requirements must be met for successful adoption of an organizational risk analysis system:

  1. Top management must understand the basis of risk analysis, commit to its consistent application in decision making, and support implementation of the risk analysis system by inspection, follow-through, and enforcement;

  2. Exploration staff must thoroughly understand risk analysis concepts and their proper geo-logic/economic applications, and accept responsibility for unbiased predictive performance;

  3. There must be a consistent system by which risk analysis is carried out on all prospects and plays considered by the company;

  4. There must be a centrally coordinated prospect inventory leading to objective selection of the annual drilling portfolio, which is keyed to meet corporate goals; and

  5. An effective process must be operating that measures predictive performance, learns lessons from experience, and passes them on to exploration staff efficiently.

Effective Techniques for Implementation

Several techniques for implementing exploration risk analysis have proved to be effective in many different organizations.


In every exploration location, it is important to have at least one knowledgeable geoscientist who is available to all prospectors and engineers, and who can help them understand the principles of risk analysis, apply them correctly, and execute risk analysis software programs properly. Such champions also serve as facilitators for project reviews by exploration teams and peer groups, and assist in postdrilling project reviews. They often function as bridges, communicating results and their implications between the geotech-nical staff and exploration management.

Most firms do not appoint champions. Instead they wait until a geotechnical professional exhibits the voluntary interest and skill and manifests inherent interest in compiling and analyzing data that express the com-pany's true exploration performance. As such professionals emerge and are recognized, they are appointed to act as champions. Ordinarily such assignments are of two to three years' duration and are seen as a natural stepping-stone toward exploration management status.

Company-consistent Play and Prospect Portfolios

Companies assemble annual, semi-annual, or biannual inventories containing plays or prospects from various exploration divisions. All ventures have been assessed using consistent techniques of risk analysis and ranked using the same economic measure. These inventories are then ranked and cut, and surviving projects are combined to form a portfolio that can be optimized for added value (risked investment efficiency) or portfolio risk-weighted value (expected net present value). If the firm has concerns about risk aversion, these measures can be calculated at optimum working interest for each included venture. Alternatively, the ventures can be chosen to optimize management's declared preference regarding risk versus reward, following the efficient frontier concept. In this approach, risk aversion considerations apply not to each project but to the overall portfolio. In either method the process generally results in capital allocation based on merit, consistent with the firm's risk preferences.

Depending on the number of ventures in the portfolio, their reserves variance, and the average chance of success, it is possible to predict the probabilistic results of drilling the portfolio. Naturally, the more wells in the portfolio, the more accurate will be its predictive power.

Most companies do not include plays and prospects in the same portfolio.

Portfolio Scrutiny by Educated Management

The key to success in corporate risk analysis lies in support and utilization by knowledgeable managers, often supported by high-level staff. To be effective, management must understand the basis for risk analysis, accept its indications of appropriate constraints, and use appropriate economic measures consistently to assign values to the constituent ventures. By reviewing portfolio results frequently, managers can reward geo-technical staff whose predictions are unbiased and objective, as well as correct those explorationists whose forecasts are overly optimistic or overly conservative.

Honoring Nature's Envelopes

Geotechnical predictions are made by professional geoscientists and engineers who have learned how to improve their estimating techniques. They employ the expectation of lognormality, known ranges of geologic parameters, and reality checks such as field-size distributions, edited success ratios, and credible upper and lower values.

Independent Multiple Estimates

Companies employ multidisciplinary exploration teams, thus promoting consideration of independent multiple estimates and multiple working hypotheses. The teams generate several versions of many geotechni-cal maps. They invite peer reviews of emerging projects and utilize exploration committees that provide experienced counsel and mentoring, but not at the expense of project accountability by the originating staff.

Positive Postdrill Reviews

We learn best by constructive examination of our own errors. The learning process is optimized by a spirit of open, objective inquiry, which may be difficult to sustain because dedicated professionals often find their mistakes painful and may fear criticism and loss of status. It is essential that postdrill reviews do not take on a punitive aspect. For that reason such reviews should not be attended by managers who have direct responsibility for salary administration and promotions, because their presence tends to impede honest inquiry and discussion of performance. A postdrill review should take no more than one day. It should be facilitated by the local champion, who should prepare a brief written summary with lessons learned and comparison of all significant predrill predictions and post-drill outcomes. Each team member should receive a copy. Copies should go to a very few concerned management and high-level staff. NOTE: It is essential that recorded predrill predictions must be those on which the actual decision to drill was based.

Performance Tracking and Communications

Results of exploratory wells and of postdrill reviews are compiled, analyzed, and reported to top management and to exploration managers and geotechnical staff with the intent of identifying bias, recurring errors, and recommending remedies, and of recognizing noteworthy and objective prospect performance.

Professional Pride in Objective Estimating

Companies that benefit by effective operational risk analysis typically undergo a change in some of their organizational ethos, in which geotechnical staff recognize and accept the need for reasonable and unbiased estimates and develop professional pride in providing them. They begin to focus on adding value—making money for the firm—rather than on just drilling wells. This results in improved corporate performance and overall strength, with the stockholder being the chief beneficiary.

Persistent Problems in Implementation

Characteristic, counterproductive patterns of implementing corporate risk analysis also recur among modern oil and gas companies.

Making Risk Analysis More Important than Prospect Generation

The most important task in petroleum exploration is the generation of new prospects and plays. That is where the value is added, and it is the most creative aspect of the business. Geotechnical staff must be aware of this basic fact. After the prospect or play has been identified, geoscientists then carry out risk analysis of the proposed venture. They attempt to measure it by estimating reserves, chance, and profitability; they design appropriate bid levels, select prospects for an optimum portfolio, and examine predictions and results to improve performance. Risk analysis will help us conduct our business more profitably and efficiently, but it does not find oil and gas. It presupposes a steady supply of good prospects, and thus of good prospectors.

The Desire for a Cookbook

Meaningful exploration risk analysis requires that professional staff must understand and integrate (1) probability and statistics, (2) economics, finance, and bid strategy, and (3) geology, geophysics, and engineering. There are no automatic answers, there are no shortcuts, and there are no cookbooks (even though some geotechnical staff are continually looking for them). All estimates involved in prospect evaluations express informed and constrained subjective probability. The beauty of the method is that predictive performance is testable over time, so that conscientious professionals can gradually improve their performance by comparing their predictions with actual outcomes. Consistent use of software can assist in addressing these problems.

Black Boxes

Because risk analysis is readily adapted to computerized, interactive flow sheets and programs, an exploration company's risk analysis procedure may become obscure, poorly understood, and mysterious—and thus take on the status of a mistrusted black box. Successful firms have learned that productive prospectors must understand the risk analysis process if they are to trust the output. Otherwise, they will try to find ways to subvert the system in order to achieve outputs they think are more appropriate. Several policies can help avoid this problem:

  1. Keep it simple; remember that risk analysis is not a precise tool—it provides approximate answers only;

  2. Be sure that geotechnical staff are trained and that knowledgeable assistance is available to counsel prospectors, especially during the first year or two; and

  3. Management should be sure that the risk analysis process is transparent and that it is not being used for corporate power games.

Prospect Police

The most successful corporate risk committees act as knowledgeable advisors and counselors, not as prospect police having the power to veto any given venture. The reason is simple: Exploration teams must be accountable for their professional work product. In estimating prospect parameters, what they need is experienced coun-sel, not an imposed committee decision. Companies that use centralized, empowered risk committees to choose the prospects for drilling may show a year or two of improved performance. After that, however, exploration performance generally drops off. Divided accountability causes diminished accountability. Once prospectors learn what the declared or unofficial hurdles are, motivational bias begins to creep back into their predictions.

It is also important that prospect presentations to the exploration committee are kept informal, using work maps and sketches. Preparation of formal maps and diagrams is not cost-effective for such presentations.

Hidden Hurdles

Nearly every company acknowledges the obscure presence in its prospect evaluation process of hidden hurdles. These are unofficial economic requirements whose effect is to screen out prospects deemed to be less attractive than others. Hidden hurdles are usually inserted into the process by staff who are not accountable for exploration performance but see themselves as guardians protecting the organization against irresponsible explorationists. Typical examples of hidden hurdles include:

  1. arbitrary elevated discount rates;

  2. overly cautious drilling-cost estimates;

  3. secret minimum prospect-reserves requirements; and

  4. excessively high minimum economic field-size requirements.

Ironically, most hidden hurdles have the opposite economic impact from what they were intended to do—they tend to select against long-term, large-reserve ventures, the kind that build companies.

Unconstrained Intuitive Decision Making

Some exploration managers are reluctant to embrace risk analysis. They correctly perceive that it will con-strain their exercise of intuitive decision making. The problem is that for some of these managers, exploration decision making becomes involved with the inappropriate exercise of ego. Risk analysis is not a substitute for good business judgment, but it will certainly assist in making proper, well-founded exploration decisions.

Economic Naîvete among Geoscientists

One of the all-too-common characteristics of geologists and geophysicists is that many of them perceive themselves as being part of a scientific priesthood in which they deliberately avoid acquiring a working knowledge about economics, finance, and business. This is largely a self-imposed handicap and may reflect a desire to be unaccountable. It may also be one of the leading reasons why geoscientists are generally absent from corporate boardrooms. The fact is, however, that economics is an essential aspect of prospect evaluations and thus of successful prospecting. When geoscientists maintain such economic naiveté, they invite improper use and even manipulation of their professional work by others. All geoscientists employed by the company should be aware that economic understanding will empower them professionally, and that it is their individual responsibility to master such knowledge.

Figures & Tables

Figure 51

Lognormality—two modes of portrayal.

Figure 51

Lognormality—two modes of portrayal.

Figure 52

Exploration reality.

Figure 52

Exploration reality.





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