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Risk of Oil Exploration

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Refer to geology concepts and the role of geophysics (especially seismic) in providing information to inform drilling decisions.

1. What is your view on risk sharing between a foreign oil company and a host country?

2. If a host country has agreed to share some of the exploration risk, should the host country insist on the amount and/or type of G&G to be conducted? Why or why not?

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1. As far as risk sharing between foreign oil company and host country, since the foreign oil company makes the decisions relating to search, exploration, and development, it should bear the risk of the initiative. In other words if the exploration fails the foreign oil company should bear the cost of exploration and development incurred. The risk is that the foreign oil company would lose capital and operation costs incurred, till it is ascertained that the exploration has failed. From the point of view of the host country, the country does not incur any capital to develop their resources (1). Only if the development of oil is successful should the foreign oil company be allowed recover the ...

Solution Summary

The answer to this problem explains the sharing of exploration risk between host country and foreign oil company. The references related to the answer are also included.

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See Also This Related BrainMass Solution

Exploration Risk in Oil Production

Please read the class notes and the referenced article to help in answering the questions. Please use per reviewed articles (see attachments).

Think about who should assume the exploration risk in an oil production sharing agreement. In your discussion posting, be sure to address the following points:

How has this week's material affected your views on risk sharing between a foreign oil company and a host country?
If a host country has agreed to share some of the exploration risk, should the host country insist on the amount and/or type of G&G to be conducted? Why or why not?

Reference: Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases. science, 185(4157), 1124-1131.

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