ModelChoice decision tree · Oil and gas

Offshore Drilling Campaign Decision

Drill an exploration well now, shoot 3D seismic first, farm out the licence, or give it up?

Complexity: ★★★★★
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From the model’s decision tree

Best first decision: Acquire 3D Seismic First

The expected value of each first option when every later decision is also made well (the tree rolled back).

First decision	Expected value
Drill Exploration Well	$34,300,000
Acquire 3D Seismic First	$40,000,000	✔ best
Farm Out (Keep 25%)	$12,612,500
Relinquish License	$0

Measure	Value
Expected value of the best strategy	$40,000,000
Chance of a loss on the best strategy	71.0%
Best outcome on the best strategy	$347,000,000
Worst outcome on the best strategy	−$53,000,000

The best strategy: chance of each outcome or less

S-curve (cumulative probability) of Acquire 3D Seismic First from the saved simulation.

The decision

An independent E&P company holds an exploration license in a deepwater block offshore West Africa. The license expires in 3 years, requiring a drilling commitment or relinquishment. The company must decide its exploration strategy.

Objective

Maximize expected NPV. This is the classic oil & gas exploration decision tree with geological risk, development cost uncertainty, and oil price risk.

The options

Option 1: Drill Exploration Well ($45M): Drill directly based on existing 2D seismic data. Five possible outcomes from major discovery (10%) to dry hole (30%). If discovery, decide: fast-track development, run appraisal wells, or sell the discovery.
Option 2: Acquire 3D Seismic First ($8M): Spend $8M on 3D seismic to de-risk the prospect before drilling. Better data improves well placement and raises discovery probability. Classic value of information decision.
Option 3: Farm Out - Keep 25% ($2M): Find a partner to drill in exchange for 75% working interest. Keeps exposure low but gives up most of the upside.
Option 4: Relinquish License: Walk away. No further obligations.

The decision tree

The tree has 6 decisions, 14 chance events and 42 outcomes. The best path is open: at every decision the best choice is marked, and the expected value beside each branch counts every cash flow from the start. Open any other branch to see what follows it.

DecisionChance event+$ cash flow on the branch

Decision: Drilling Campaign

Drill Exploration Well −$45,000,000expected $34,300,000
Chance: Exploration Well Result
- 10% Major Discoveryexpected $353,000,000
  Decision: Appraise Major Discovery
  - Fast-Track Development −$350,000,000expected $165,500,000
    Chance: Fast-Track Outcome
    25% On Budget + High Reservesexpected $530,000,000
    Chance: Oil Price (High Reserves)
    25% High Oil Price +$1,500,000,000payoff $1,105,000,000
    50% Mid Oil Price +$900,000,000payoff $505,000,000
    25% Low Oil Price +$400,000,000payoff $5,000,000
    40% Over Budget + Good Reserves −$80,000,000expected $187,500,000
    Chance: Oil Price (Good Reserves)
    25% High Oil Price +$1,100,000,000payoff $625,000,000
    50% Mid Oil Price +$650,000,000payoff $175,000,000
    25% Low Oil Price +$250,000,000payoff −$225,000,000
    35% Major Cost Overrun −$150,000,000expected −$120,000,000
    Chance: Oil Price (Cost Overrun)
    25% High Oil Price +$800,000,000payoff $255,000,000
    50% Mid Oil Price +$400,000,000payoff −$145,000,000
    25% Low Oil Price +$100,000,000payoff −$445,000,000
  - Appraisal Wells First −$60,000,000expected $353,000,000 ✔ best
    Chance: Appraisal Results
    50% Confirms Large Field +$700,000,000payoff $595,000,000
    35% Smaller Than Expected +$300,000,000payoff $195,000,000
    15% Uneconomic at Current Price +$20,000,000payoff −$85,000,000
  - Sell Discovery +$250,000,000payoff $205,000,000
- 15% Significant Findexpected $185,000,000
  Decision: Appraise Significant Find
  - Develop (FPSO) −$200,000,000expected $110,000,000
    Chance: Oil Price (Significant)
    25% High Oil Price +$600,000,000payoff $355,000,000
    50% Mid Oil Price +$350,000,000payoff $105,000,000
    25% Low Oil Price +$120,000,000payoff −$125,000,000
  - Appraisal Well −$40,000,000expected $185,000,000 ✔ best
    Chance: Appraisal Result (Significant)
    40% Upgrades Estimate +$400,000,000payoff $315,000,000
    40% Confirms Estimate +$250,000,000payoff $165,000,000
    20% Downgrades +$50,000,000payoff −$35,000,000
  - Sell Discovery +$100,000,000payoff $55,000,000
- 20% Marginal Findexpected −$20,000,000
  Decision: Marginal Find Options
  - Tieback to Nearby Platform −$80,000,000expected −$28,500,000
    Chance: Tieback Economics
    45% Profitable Tieback +$150,000,000payoff $25,000,000
    30% Breakeven +$80,000,000payoff −$45,000,000
    25% Uneconomic +$20,000,000payoff −$105,000,000
  - Sell to Nearby Operator +$25,000,000payoff −$20,000,000 ✔ best
  - Plug & Abandon −$5,000,000payoff −$50,000,000
- 25% Shows (Non-Commercial)payoff −$45,000,000
- 30% Dry Holepayoff −$45,000,000
Acquire 3D Seismic First −$8,000,000expected $40,000,000 ✔ best
Chance: 3D Seismic Interpretation
- 30% Strong Prospectexpected $125,000,000
  Decision: Drill Strong Prospect?
  - Drill Well −$45,000,000expected $125,000,000 ✔ best
    Chance: Well Result (Strong Prospect)
    40% Discovery +$400,000,000payoff $347,000,000
    30% Marginal +$60,000,000payoff $7,000,000
    30% Drypayoff −$53,000,000
  - Farm Out with Data +$30,000,000payoff $22,000,000
- 40% Moderate Prospectexpected $10,000,000
  Decision: Drill Moderate Prospect?
  - Drill Well −$45,000,000expected $10,000,000 ✔ best
    Chance: Well Result (Moderate)
    20% Discovery +$300,000,000payoff $247,000,000
    30% Shows +$10,000,000payoff −$43,000,000
    50% Drypayoff −$53,000,000
  - Don't Drill +$5,000,000payoff −$3,000,000
- 30% Weak / No Prospect +$3,000,000payoff −$5,000,000
Farm Out (Keep 25%) −$2,000,000expected $12,612,500
Chance: Farm-Out Interest
- 35% Major Operator Takes Itexpected $31,750,000
  Chance: Major Operator Drills
  - 25% Discovery (Your 25%) +$120,000,000payoff $118,000,000
  - 25% Marginal (Your 25%) +$15,000,000payoff $13,000,000
  - 50% Dry Holepayoff −$2,000,000
- 35% Junior Operator +$8,000,000payoff $6,000,000
- 30% No Interestpayoff −$2,000,000
Relinquish Licensepayoff $0

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Key assumptions

Assumption	Value	Notes
Exploration Well Cost	$45,000,000	Deepwater well, 60-90 day program
3D Seismic Survey	$8,000,000	800 sq km, processing & interpretation
Fast-Track Development	$350,000,000	FPSO + subsea, 3 year build
Appraisal Well Program	$60,000,000	2 appraisal wells + testing
Major Discovery Probability	10%	100+ MMbbl recoverable
Significant Find Probability	15%	30-100 MMbbl recoverable
Dry Hole Probability	30%	No commercial hydrocarbons
Oil Price Scenarios	$50/70/100 bbl	Low/Mid/High, equal weighting
Major Discovery NPV (Mid)	$900M	At $70/bbl, fast-track development
Development Cost Overrun	35-40%	Common in deepwater projects

The figures are illustrative: the companies and numbers are invented for teaching.

Try it in ModelChoice

Strategy Table. Compare drill-now vs seismic-first vs farm-out strategies
Sensitivity Analysis. How does oil price and discovery probability affect EV?
Risk Profile. Visualize the high-risk/high-reward nature of exploration

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An illustrative example: the figures are invented for teaching. Last updated 9 October 2026.