Investment discipline improves exploration performance: AAPG President

March 02, 2006

Current President of the American Association of Petroleum Geologists Dr. Peter R Rose is of the firm view that adoption of an investment approach would reduce risk associated with oil and gas ventures.

Speaking at a lecture 'Taking Risk out of Petroleum Exploration', organized by the Association of Petroleum Geologists at New Delhi on 1st March 2006, the renowned exploration expert said that exploration business is analogous to casino business where the casino operator knows of gaming devices and the tables, and the odds of each game are well known to the operator, and they are set to be slightly in the operator's favour.

"Though the analogy of casino is distasteful to geoscientists", Dr. Rose said, "an exploration manager is equivalent to a casino operator who can predict with considerable precision what is profit will be at the end of the day, once he knows the number of tables, players of the evening and house rules". He plays repeated trials game in which the Expected Value [(the chance of success x value of success) , (chance of failure x cost of failure)] of each trial is positive in his favour.

Dr. Rose, who has authored a number of papers and a book on 'Risk Analysis and Portfolio Management', elaborated, "the diversity of investment opportunities, like new field wildcats, step-outs, development wells, enhanced recovery projects, and property acquisitions, could be likened to various types of games in the casino".

The difference between games in casino and exploration is that while the odds on games are known, the odds on exploration prospects are estimated by different geoscientists in different ways, as the variance (uncertainty) in exploration is more than that in games. That is where 'Unbiased Estimates' are very important in exploration investments.

"As million of dollars are invested based on estimates, one needs to be cautious and objective in estimating, not allowing bias or optimism to creep in". Discriminating economic screens and yardsticks are essential to define the prospect inventory in the exploration portfolio.

The audience, comprising of members of APG and exploration veterans like Mr. S N Talukdar and Mr. P K Chandra, participated in the interactions that followed the lecture. Many geoscientists were of the opinion that optimism is necessary to succeed in exploration business, as "Oil is found first in the mind of the geoscientist".

A number of geoscientists, many of them from different locations of ONGC across the country,
turned up to participate in the lecture of AAPG President Dr. Peter R Rose.

Dr. Rose, replying to some of the queries, said, "While optimism is good to the extent it elevates performance, it should not be to that extent that it results in shareholders in the exploration business losing money. Explorationists have a responsibility towards the stakeholders."

Dr. Rose, who started his career as a geologist with Shell Oil Company, added that though it is important to find oil, it is more important to find money for the exploration enterprise. Elaborating his point, he argued that overestimating potential prospects has resulted in oil majors like Shell, Amoco, Mobil losing lot of value during eighties and early nineties.

Dr. Rose explained that technology is helping geoscientists evaluate prospects better, and not identify better prospects. "Technology, today, allows one to reject prospects which one would have explored without the technology, thus saving the dollars, which can be better invested elsewhere."

Dr. Peter R Rose, who is the first AAPG President to visit India,
as a part of his Asia-Pacific tour, came to ONGC’s office to see Mr. Subir Raha.

The exploration expert, who founded Rose and Associate LLP, USA, said that success in exploration business depends only partly on technology, and more on portfolio management. "Managing exploration is managing portfolio", he told the geoscientists, giving them some tips on E&P portfolio management. "Objective evaluation, and not salesmanship, focus on results and not on activity, are required".

"A centrally coordinated portfolio management is not incompatible with autonomous Business Unit (BU) operation", he shared, adding that instead of exploration cell, business units should take the final call on selection of prospects, and the central portfolio unit should track the performance of all business units.

Dr. Rose said that geoscientists need to bring in change in their approach to improve the lost credibility of the exploration function, as they have not delivered large reserves for quite some time. "Geoscientists have to learn continuously to distinguish between Bad Luck and Bad Geo-scientific Performance. The main barriers to improved geo-scientific effectiveness are behavioural rather than technical."