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AAPG Bulletin

Abstract

AAPG Bulletin, V. 101, No. 12 (December 2017), P. 1905-1916.

Copyright ©2017. The American Association of Petroleum Geologists. All rights reserved.

DOI: 10.1306/0327171622817003

Integrate instead of ignoring: Base rate neglect as a common fallacy of petroleum explorers

Alexei V. Milkov1

1Department of Geology and Geological Engineering, Colorado School of Mines, 1516 Illinois Street, Golden, Colorado 80401; [email protected]

ABSTRACT

When petroleum explorers estimate geological probability of success (POS) and success case volumes for their prospects, they commonly suffer from various biases and fallacies that result in poor assessments. Using a data set of 25 exploration wells drilled by Lundin Petroleum on the Norwegian Continental Shelf (NCS) during the 5-yr period from 2011 to 2015, I demonstrate the base rate neglect fallacy in petroleum exploration. Lundin explorers consistently and significantly underestimated the geological POS and overestimated the success case volumes relative to the available base rate information on historical exploration success rates and sizes of previously discovered fields in the NCS area. These findings are consistent with previous studies of exploration track records of the industry and individual companies. Explorers erroneously tend to ignore the base rates likely because they do not see them as relevant to the evaluation of their specific prospects. As a result, exploration portfolios generally fail to deliver on promise. However, base rate neglect fallacy can be mitigated and eliminated. Explorers should make an effort to learn the base rates relevant to their prospects and integrate them with prospect evaluations, and managers should ensure that modeled portfolio outcomes are consistent with relevant base rates.

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