Geological Risk Diversification Efficiency in Petroleum Exploration

The geological risk in the petroleum exploration is interpreted as the probability that the exploration efforts will not lead to the discovery of accumulations with recoverable resource volumes. Because the risk of failure in exploration projects is normally much higher than the probability of success the oil companies strive for the diversification of the risk through multilateral swaps of concession interests. The diversification attempt leads to the development of a drilling portfolio of the exploration business plan. Portfolio probabilities of failure and success computed from the projects’ failure/success probabilities are indicators of the geological risk diversification efficiency. The paper analyses that how many simultaneous exploratory drilling projects are needed to ensure efficient risk diversification. It is concluded that the risk diversification is thought efficient if the relationship (ratio) of the drilling portfolios’ probabilities of failure and success meets the risk aversion attitude of the Management.