Publications

Despite the restrictions imposed by the hierarchial organization of most oil companies, including national companies, the exploration process does not logically end with a discovery. At least in high-risk, frontier areas, the contributian of exploration should continue until the development decision is made. This decision is the most economically significant one that must be faced during the course of establishing new productive capacity-the real goal of exploration.Most frontier areas-deep, stormy waters far offshore or remote arctic regions-require massive capital investments for development, therefore, the development decision must be made in a timely manner even though available estimates of reserves and costs may be very uncertain. If the uncertainty involved is quantified, it is possible to specify a procedure that will yield optimal design parameters for any assumed level of reserves-optimality, in this sense, may be predicated on any chosen economic criterion. Then, taking into account, the uncertainty in the estimated reserves, per se, an expected value for the chosen economic criterion can be determined for each assumed level of reserves. Finally, on the basis of these expected values, the optimal reserve value, for design purposes, can be found, and, the development decision may be made by considering the distributi0.n of thechosen economic criterion associated with the optimal design level of reserves.A procedure for the determination of the optimal level of reserves, a discussion of the economic criteria that may be used and an analysis of the development decision are presented in this paper. A simple numerical example is also included.