Undoubtedly there are “lucky” companies, but some companies are better able to capitalize on their luck.

I’ve recently been involved in examining exploration performance and relating exploration success to internal processes, which involved defining a number of key factors including best practices, central accountability, rigorous risk management processes and consistent peer reviewed technical evaluations underpinned by a strategic play-based approach to planning. Although there is some correlation between exploration success and best practice, it is not as clear cut as I would have liked.

There are companies I would class as a shambles in exploration decision-making, yet many of those have been involved in major successes. Conversely, there are well-managed companies with excellent internal processes that are less successful in their exploration efforts.

Napoleon commented once that he wanted his generals to be lucky. The same could be said for operating companies.This is a chance business; so luck must play a part.

Luck versus planning
Consider the Buzzard discovery, the biggest recent North Sea find – a well-known structure operators had decided was too risky to drill. There was clear risk – a stratigraphic trap, no direct hydrocarbon indicator support, and an irreducible risk of updip seal.

Encana successfully drilled the well with a risk of 1:7. This was followed by a number of dry wells pursuing the same stratigraphic play, confirming Buzzard as unique and, therefore, lucky.

Similarly, BG’s participation in the Tupi discovery contained a large element of luck.

What cannot be denied is that in the case of Tullow in West Africa, BG in Brazil, and BP in the Gulf of Mexico, the acreage position was such that they could capitalize on luck. The companies were in positions where there were large play structures, and the success case was huge, having captured the core of the potential play. The play test derisked the play such that the drilling program was successful.

Where luck does not play a part is in having enough capital to play the game in enough new plays to capture the upside. A company is lucky when it finds success with one throw of the dice, or that it has a strategy involving a portfolio of new play tests, one of which is successful – and that success is at sufficient volume to pay off substantially.

ExxonMobil appears to be taking this approach. The company is taking acreage positions in frontier basins with substantial structures. Typical of this is the Dunqin prospect, a massive structure potentially containing tens of Tcf of gas. However, the prospect has well-known irreducible risk. If successful, it will be the result of a portfolio strategy for which the successes should outweigh the failures. For Providence, a junior partner, success in Dunqin would be lucky.

A number of exploration companies were floated on the Alternative Investment Market (AIM) through the early 2000s to back a given individual’s prospect ideas. As a portfolio, these AIM companies had some merit, but as individual investments, the sums did not add up. Statistics indicate a significant probability of failure with a probability of success to generate the expected return rate of 20% plus, vanishingly small. They were not sufficiently capitalized to support a risky drilling program and essentially were hoping for a “six” with the first throw. Investors know that strategy that reduces the influence of luck to the minimum is vital.

Luck plays a big part in exploration success, and there are lucky companies; however, there are three keys areas where luck does not play a part:
• Securing enough capital to “throw the dice” enough times that statistics are favorable to reach an expected outcome in terms of value;
• Drilling new tests in plays for which a company has an acreage position covering the core of the play with large unrisked yet-to-find resources; and
• On success, following a known route to de-risk the play such that the drilling program is successful.

A one-off single play test for a junior oil company is a company-maker and is lucky – but I would not bet the house on the risk!

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