What to expect when you are prospecting: How new information changes our estimate of the chance of success of a prospect

Abstract

There is a common belief that we can expect to add value to a prospect or prospect portfolio by improving the prospect chance of success (Pg) as a consequence of acquiring information and doing work. Established laws of probability dictate that this is incorrect. We do expect new information to add value to the exploration cycle, but not by an expectation of improving the prospect risk. New information may result in an increase or a decrease of Pg, but the expected result (the average of all possible outcomes) is zero change. Moreover, for a typical exploration prospect (Pg < 0.5), we expect that new information will downgrade more prospects Pg than are upgraded. Real-world prospect data are neither suitable nor publically available to study this. Instead, the concept is explored using an analogous process (prenatal prediction of fetus gender) for which good statistics exist, and by creating a synthetic prospect that can be analyzed in a repeatable way. The results support the predictions made above.

Prospect risk, pot odds, and efficient drill or no-drill decision making: What the exploration business can learn from high-stakes poker

“…A possible definition is that the error represents the possible difference between what Pg is currently estimated to be and what it might be in the future after all reasonable predrill technical work has been completed. The future Pg estimate may be increased, be decreased, or remain the same, but the mean of all these possible future states is equivalent to the prior estimate (Peel and Brooks, 2015;Peel and White, 2015).…”

“…If we can estimate these future conditional probabilities, P2 and P3, then we can calculate the likelihood of a bad news outcome (x) that is compatible with them using the law of total probability (see discussion in Peel and White, 2015;Peel and Brooks, 2015), as follows: P1 = ðxÞðP2Þ + ð1 -xÞðP3Þ; hence x = ðP3 -P1Þ ðP3 -P2Þ = Figure 5B shows a worked example in which a prospect has a currently estimated Pg of 0.3, positive EV, and pot odds of 0.2. A drill or drop decision must be made immediately to retain the license.…”

“…Geological success of a prospect: the following discussion is modified from Peel and Brooks (2015). The chance of prospect success is critical to the understanding of prospect economics (e.g., Allais, 1956;Newendorp, 1972;Megill, 1977;Rose, 1987Rose, , 2001.…”

“…The term "risk" is also used in some sources to describe the chance of success (Rose, 1992(Rose, , 2001White, 1993), with potential confusion as to whether it means the chance of the desirable outcome (Pg) or the chance of the undesirable outcome (1 -Pg), and with further confusion with the use of the same word to mean a different concept in financial literature (see discussion in Peel and Brooks, 2015). Therefore, in this article, the word risk is used in only a qualitative sense.…”

“…The method of Peel and Brooks (2015) is developed to make a rational estimate of the chance of regret.…”