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Optimal f: A Capital Management Tool for Multi-Well Drilling Commitment Decisions
Capital management tools are designed to maximize the return and mitigate the risk of a substantial financial loss. When applied to oil and gas investments, they use information about prospect size, chance, value and capital available to assist with working interest decisions for individual wells (MacKay, 2015). These decisions can be combined to assess an appropriate mixture of projects at recommended working interest levels for a more diversified portfolio (MacKay and Citron, 2016). Both previous publications used the Kelly Criterion to estimate HOW MUCH of a particular project should be capitalized. Optimal f addresses not how much but to HOW MANY projects should be capitalized. It is designed to address a group of similar projects where all could be flowing discoveries, but of highly variable initial productive rates and/or present values. Thus, Optimal f could be a helpful tool for sizing the number of wells in unconventional pilot projects.
We will focus on a group of nine similar wells that are sequentially drilled using the well present values and the capital available and calculate the number of additional well commitments that should be made in the same project or play. The results for each of the nine wells will be accumulated sequentially and the proposed future commitment will be calculated after the completion of each well as the well count builds from two to nine wells.
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