Improper accounting for covariation of uncertain quantities that characterize prospect, play, basin and corporate exploration portfolio uncertainties can lead to seriously distorted appraisals of exploration and investment risk. The roles played by covariability up the ladder of aggregation from prospect to exploration portfolio are examined. The distinction between systematic risk induced by the dependence of all exploration opportunities on price variation (all boats rising and falling on the tide of prices) and non-systematic or diversifiable risk (geologic and engineering) is highlighted in the context of deciding how to allocate exploration effort among competing exploration opportunities. Valuation of projects that can be flexibly managed over time cannot be correctly valued using probabilistic net present value methods that employ a fixed discount rate. Modern asset value methods derived from the theory of stock options allows correct accounting for flexible timing of exploration and development decisions. An example shows how employ these methods.
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