Risk and Oil Exploration

Abstract

‘Risk’ is defined in the dictionary as ‘hazard, danger; exposure to mischance or peril; the chance or hazard of commercial loss’. To the businessman in general, the idea of risk reflects his uncertainty or lack of foreknowledge of possible adverse results of a particular decision or action. A low-risk business is therefore one in which the financial results can be confidently predicted for several years in advance, and are little affected by external factors over which the company has no control. Oil and gas exploration, on the other hand, often results only in dry holes or in the discovery of resources that are too small or remote to be commercially developed. Thus in addition to the normal commercial risks involved in trying to produce something and sell it at a profit (especially in a foreign country) oil and gas exploration is exposed to a special category of technical or geological risk, the handling of which is the main subject of this chapter.