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News Release, Kansas Geological Survey, Jan. 24, 1996

Geologist writes about risk in the oil business

LAWRENCE--To find oil, first you need to know the underground geology. To take the next step--deciding which wells to drill and which to avoid--requires a knowledge of cash flow and finance.

Taking that next step in making exploration decisions is the focus of a new book co-authored by a researcher at the Kansas Geological Survey, based at the University of Kansas.

John Davis, a Survey specialist in the mathematics of geology, is one of the authors of Computing Risk for Oil Prospects, published by Pergamon Press. The book's co-authors are John Harbaugh, of Stanford University, and Johannes Wendebourg, of the Institute Fracais du Petrole in France.

According to Davis, companies traditionally make drilling decisions in two parts. A geologist works up a promising prospect and recommends that it be drilled. Then the financial officers in an oil company--the "people in green eye shades," says Davis--make the final decision about drilling.

By providing mathematical formulas that analyze risk, and describing other statistical methods that can be used to study prospects, Davis hopes to help explorationists better understand and become more involved in drilling decisions.

"We want to help people learn how to turn geological information into a financial forecast," said Davis. "Right now, people handle risks intuitively. We want to teach them how to use statistical methods to choose alternatives that have the greatest return."

As an example, Davis compares two possible drilling scenarios. One is a prospect in Oklahoma, where substantial amounts of information are available, risks are low, but any new well will probably produce small amounts of oil. A second prospect, in a far less explored part of the world, may be much riskier, but a strike could produce far more oil.

The book provides explorationists the mathematical techniques and computer programs for comparing the risks and return of the two alternative wells.

"Geologists in small or medium-sized companies usually have limited input into financial decisions," said Davis. "But as companies downsize, geologists have to become involved in more aspects of drilling decisions. This book helps them integrate geologic information with financial considerations."

The book contains chapters on estimating the amount of oil in a field, estimating field size, using seismic data and other mapped information, forecasting cash flow over time, and analyzing risk. It includes two floppy disks of computer programs for risk analysis and calculating the expected financial returns from drilling.

"There's lots of information available to explorationists, if it's used appropriately," said Davis. "The goal of this book is to help people better appraise prospects before they are drilled."

Davis is the author of a number of technical articles and co-author of several books, including Probability Methods in Oil Exploration, published in 1977, and Statistics and Data Analysis in Geology, published in 1973.

Story by Rex Buchanan, (785) 864-3965

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