Exploration of Correlated Prospects and Possible Joint Development Solutions

Drilling exploration wells depend on the uncertainty we perceive. With some simplification, this uncertainty is about the value of producible hydrocarbons. To drill a prospect, the expected benefits from producing and selling hydrocarbons should outweigh the costs. This principle also applies to clusters of interrelated exploration targets. Here, the benefits of drilling each prospect is information about the neighbouring prospects, proving producible hydrocarbons, or both; these benefits should outweigh the aggregate costs. In practice, estimating the expected benefit could be challenging especially when multiple smaller discoveries are developed under a joint development scheme. With these interrelationships, what is the optimal drilling strategy? In addition, what is the economic value of a group of prospects? This paper discusses the effect of joint development economics on perceived uncertainty and drilling decisions. We suggest a framework for valuation of correlated prospects.