RE:Maybe a silly question
Not a silly question, but a hard one to answer. Can you find what the company says the Chance
of Success is? Are they saying Geologic Chance of Success (GCOS) or Commercial Chance
of Success (CCOS) ? Depending on the well, the GCOS is somewhere from lower to much
lower than the CCOS.
If you can come up with a predicted CCOS, cut a third of that immediately. I've been following
predicted COS's for years, and companies routinely exaggerate their chances.
If you end up with your modified CCOS being 17%, you still can't really calculate XOP's value,
because if the field is deemed commercial, then it will be a multi-well field, and XOP does \
not have the cash to pay for their share of more wells, and these wells are very expensive.
What will they have to do? Get a loan? Sell bonds? Farm out a big chunk of their 17% share?
However they get the money, the people supplying it will know XOP is over a barrel, so
don't expect favorable terms. Thinking XOP will just soak up 17% of whatever XOM finds is
miles from what will eventually happen.
Another way to come at it is, what is Exxon thinking? They are shelling out $120m for an
83% share of the field, and that's just for a wildcat well. Let's say they find something they
deem to be commercial. What will it cost them to develop the field? Just Phase 1 at Jubilee
cost well over $1b. Jubilee is a bigger field than ours, but in much shallower water. Exxon
is certainly looking at a capex bill well in excess of $500m, let's say $700m.
The next consideration is that the capex is front-loaded, while the production is much more
spread out, time-wise. Time-discounting would thus have a far bigger effect on the value
of the oil than on the capex.
How much oil would Exxon have to find to then consider the field to be commercial? Maybe
200mm bbl recoverable? That's around 10% of the gross P-90, so we could Exxon's
minimum expected CCOS at 10%, which is not unreasonable for a very-deep-water wildcat
situation. Personally, I just have a feeling that Exxon would have to see the CCOS as at least
20% to go ahead with this project in the current market environment. Heck, they may even
think it's 30%+, but they are unlikely to admit that.