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Decision Tree — Wildcat Well: Seismic, Drill or Farm Out

An exploration decision with an information option: 3-D seismic at $350k splits the prospect into closed-structure and no-closure posteriors, after which the tree drills on closure and farms out otherwise — worth $1,816k against $1,280k for farming out blind and $980k for drilling blind. Illustrative values.

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Wildcat prospect — shoot 3-D seismic, drill blind or farm out?Wildcat prospect — shoot 3-D seismic, drill blind or farm out?Expected NPV to the operator, US$ thousands3 decisions · 7 chance nodes · 18 outcomes · maximise expected valueOPTIMAL FIRST CHOICEShoot 3-D seismic·EV $1,816kDrill without seismicFarm out nowFarm outDry hole0.395Marginal discovery0.368Commercial discovery0.237Drill the wellDry hole0.772Marginal discovery0.206Commercial discovery0.022Dry hole0.6Marginal discovery0.28Commercial discovery0.12Dry hole0.6Marginal discovery0.28Commercial discovery0.12Partner's well resultEV $1,558k$900knet $550k$1,400knet $1,050k$2,900knet $2,550kWell resultEV −$1,133k−$2,800knet −$3,150k$3,500knet $3,150k$14,000knet $13,650kWell resultEV $980k−$2,800k$3,500k$14,000kPartner's well resultEV $1,280k$900k$1,400k$2,900kShoot 3-D seismiccost $350k · net $1,816kClosed structure0.456No closure0.544Drill the wellDry hole0.395Marginal discovery0.368Commercial discovery0.237Farm outDry hole0.772Marginal discovery0.206Commercial discovery0.022Exploration planEV $1,816kSeismic interpretationEV $2,166kDrill or farm out (closure)EV $3,500kWell resultEV $3,500k−$2,800knet −$3,150k · P 0.18$3,500knet $3,150k · P 0.168$14,000knet $13,650k · P 0.108Drill or farm out (no closure)EV $1,047kPartner's well resultEV $1,047k$900knet $550k · P 0.42$1,400knet $1,050k · P 0.112$2,900knet $2,550k · P 0.012DecisionChanceOutcomeOptimal strategyRejected alternativeRisk profile·cumulative probability by first choice0%25%50%75%100%−$5,000k$0$5,000k$10,000k$15,000kfinal outcome, net of costsFIRST CHOICEEVShoot 3-D seismic$1,816kσ $4,541k · P(loss) 0.18Drill without seismic$980kσ $5,540k · P(loss) 0.6Farm out now$1,280kσ $637k · worst $900kWhat the rollback showsBest first choice: “Shoot 3-D seismic”, EV $1,816k — $536k ahead of the next best, “Farm out now” ($1,280k).If the path reaches “Drill or farm out (closure)”: “Drill the well” ($3,500k) over “Farm out” ($1,558k).If the path reaches “Drill or farm out (no closure)”: “Farm out” ($1,047k) over “Drill the well” (−$1,133k).Following it, the outcome ranges from −$3,150k to $13,650k across 6 possible results, standard deviation $4,541k; an 18% chance of a loss.Note: Prior: dry 0.60, marginal 0.28, commercial 0.12. Seismic shows a closed structure over 30% of dry, 60% of marginal and 90% of commercial prospects, so P(closed) = 0.456; posteriors are rounded to three places.Note: Illustrative values for a fictional onshore licence. Farm-out terms: US$900k carried interest plus an override royalty.

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title "Wildcat prospect — shoot 3-D seismic, drill blind or farm out?"
subtitle "Expected NPV to the operator, US$ thousands"
currency $
unit k
risk-profile compare
note "Prior: dry 0.60, marginal 0.28, commercial 0.12. Seismic shows a closed structure over 30% of dry, 60% of marginal and 90% of commercial prospects, so P(closed) = 0.456; posteriors are rounded to three places."
note "Illustrative values for a fictional onshore licence. Farm-out terms: US$900k carried interest plus an override royalty."

decision "Exploration plan"
  "Shoot 3-D seismic" cost 350 -> chance "Seismic interpretation"
    "Closed structure" p 0.456
      decision "Drill or farm out (closure)"
        "Drill the well" -> chance "Well result"
          "Dry hole" p 0.395 -> -2,800
          "Marginal discovery" p 0.368 -> 3,500
          "Commercial discovery" p rest -> 14,000
        "Farm out" -> chance "Partner's well result"
          "Dry hole" p 0.395 -> 900
          "Marginal discovery" p 0.368 -> 1,400
          "Commercial discovery" p rest -> 2,900
    "No closure" p rest
      decision "Drill or farm out (no closure)"
        "Drill the well" -> chance "Well result"
          "Dry hole" p 0.772 -> -2,800
          "Marginal discovery" p 0.206 -> 3,500
          "Commercial discovery" p rest -> 14,000
        "Farm out" -> chance "Partner's well result"
          "Dry hole" p 0.772 -> 900
          "Marginal discovery" p 0.206 -> 1,400
          "Commercial discovery" p rest -> 2,900
  "Drill without seismic" -> chance "Well result"
    "Dry hole" p 0.60 -> -2,800
    "Marginal discovery" p 0.28 -> 3,500
    "Commercial discovery" p rest -> 14,000
  "Farm out now" -> chance "Partner's well result"
    "Dry hole" p 0.60 -> 900
    "Marginal discovery" p 0.28 -> 1,400
    "Commercial discovery" p rest -> 2,900