Smith Exploration Prospect Drilling Order A Value of

Smith Exploration Prospect Drilling Order A Value of Information Case Study in Exploration Play Strategy

Background Information 1 The Smith play has two sizable prospects targeted for drilling next year. Prospect B Reservoir 0. 65 Source 0. 30 Trap 0. 70 0. 90 Seal 1. 00 0. 137 0. 176 NPV ($mm) 120 150 Well Cost ($mm) -11 ENPV ($mm) 6. 9 17. 3 Geologic Risk The geologic risk assessments are shown to the right. The chance of a source and a quality reservoir are considered to be shared geologic risk factors. Prospect B is potentially larger (higher value as a result) and has a higher chance of trap. Total COS Which prospect should be drilled first? Is there a preferred, or more valuable, order to drill the prospects? © 2012 Decision Frameworks LP. All rights reserved. Do not copy. A 2

Background Information 2 The reservoir at locations A and B developed under similar conditions. However, the team is concerned about the geologic transition between the prospects and they feel better able to interpret the existence of reservoir at A from the information they collect at B. Given that reservoir exists at B, there is a 60% probability that they correctly interpret its existence from the information collected at A. n Given that reservoir exists at A, there is a 70% probability that they correctly interpret its existence from the information collected at B. n © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 3

Background Information 3 The potential oil source (or kitchen) is down-dip from both prospects and the oil is expected to have migrated through the reservoir at Prospect A to spill over into the trap at Prospect B. The projected hydrocarbon migration path is displayed below. (This is only one of the potential geologic realities. ) 4 m 00 r 10 tou con © 2012 Decision Frameworks LP. All rights reserved. Do not copy. m 00 r 20 tou con m 00 r 30 tou con m 00 r 40 tou con Consortium et al.

Background Information 4 As such, the team feels that Prospect A is more reliable to tell them about the existence of source for Prospect B, then the other way around. Given that an oil source exists at B, there is a 85% probability that they correctly interpret its existence from the information collected at A. n Given that oil source exists at A, there is a 65% probability that they correctly interpret its existence from the information collected at B. n © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 5

Smith Exploration Prospect Drilling Order PROBLEM FRAME

Problem Statement & Issues © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 7

Decision Focus (Hierarchy) © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 8

Key Uncertainties © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 9

Evaluation Focus Drill Prospect A First © 2012 Decision Frameworks LP. All rights reserved. Do not copy. Drill Prospect B First 10

Smith Exploration Prospect Drilling Order EVALUATION 1: DRILLING PROSPECT B FIRST

Evaluation Structure: Drilling Prospect B First © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 12

Prospect A: VOI Calculation Setup © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 13

Prospect A: Base Value The value of Prospect A with no more information (that is, without information from Prospect B first) is 6. 9 mm$. As such, we would be prepared to drill Prospect A today, without any new information to upgrade the prospect. © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 14

Prospect A: Value of Perfect Information on Reservoir Presence from Prospect B The value of Prospect A increases 3. 9 mm$ with perfectly reliable information on the existence of reservoir from the information collected at Prospect B. © 2012 Decision Frameworks Inc. All rights reserved. Do not copy. 15

Reliability of Prospect B to Discern Reservoir Presence at Prospect A © 2012 Decision Frameworks Inc. All rights reserved. Do not copy. 16

Prospect A: Value of Imperfect Information on Reservoir Presence from Prospect B The value of Prospect A is unchanged with imperfect information on reservoir presence because we decide to drill the well even when information from Prospect B downgrades the chance of Prospect A. © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 17

VOI vs. Prospect A Reservoir Chance Prospect A Sensitivity 3. 0 2. 5 VOI (mm$) 2. 0 1. 5 1. 0 0. 5 Prospect A Reservoir Chance © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 18 % 0. 0 10 0% 95. 0% 90. 0% 85. 0% 80. 0% 75. 0% 70. 0% 65. 0% 60. 0% 55. 0% 50. 0% 45. 0% 40. 0% 35. 0% 30. 0% 25. 0% 20. 0% 15. 0% 10. 0% 5. 0% 0. 0

VOI vs. Reliability of Prospect B to Interpret Reservoir Presence at Prospect A Sensitivity $4. 50 $4. 00 $3. 50 VOI(mm) $3. 00 $2. 50 $2. 00 $1. 50 $1. 00 $0. 50 Reliabilty of Prospect B to Interpret Reservoir Presence at Prospect A © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 19 % 0. 0 10 5% 97. 0% 95. 5% 92. 0% 90. 5% 87. 0% 85. 5% 82. 0% 80. 5% 77. 0% 75. 5% 72. 0% 70. 5% 67. 0% 65. 5% 62. 0% 60. 5% 57. 0% 55. 5% 52. 50. 0% $0. 00

Prospect A: Value of Perfect Information on Source Presence from Prospect B The value of Prospect A increases 7. 7 mm$ with perfectly reliable information on the existence of source from the information collected at Prospect B. © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 20

Reliability of Prospect B to Discern Source Presence at Prospect A © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 21

Prospect A: Value of Perfect Information on Source Presence from Prospect B The value of Prospect A is unchanged with imperfect information on reservoir presence because we decide to drill the well even when information from Prospect B downgrades the chance of Prospect A. © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 22

VOI vs. Prospect A Source Chance Prospect A Sensitivity $4. 00 $3. 50 $3. 00 VOI(mm$) $2. 50 $2. 00 $1. 50 $1. 00 $0. 50 Prospect A Source Chance © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 23 % 0. 0 10 0% 95. 0% 90. 0% 85. 0% 80. 0% 75. 0% 70. 0% 65. 0% 60. 0% 55. 0% 50. 0% 45. 0% 40. 0% 35. 0% 30. 0% 25. 0% 20. 0% 15. 0% 10. 0% 5. 0% $0. 00

VOI vs. Reliability of Prospect B to Interpret Source Presence at Prospect A Sensitivity $9. 00 $8. 00 $7. 00 VOI(mm$) $6. 00 $5. 00 $4. 00 $3. 00 $2. 00 $1. 00 Reliability of Prospect B to Interpret Source Presence at Prospect A © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 24 % 0. 0 10 5% 97. 0% 95. 5% 92. 0% 90. 5% 87. 0% 85. 5% 82. 0% 80. 5% 77. 0% 75. 5% 72. 0% 70. 5% 67. 0% 65. 5% 62. 0% 60. 5% 57. 0% 55. 5% 52. 50. 0% $0. 00

Play Value with Prospect B First Prospect A Prospect B Perfect Information Imperfect Information Base Value 6. 9 VOI - Reservoir 3. 9 0. 0 VOI - Source 7. 7 0. 0 Base Value 17. 3 35. 8 24. 2 TOTAL PLAY © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 25

VOI vs. Prospect A NPV Given Failure Prospect A Sensitivity $7. 00 $6. 00 VOI(mm$) $5. 00 $4. 00 $3. 00 $2. 00 $1. 00 0 $9. 00 $10. 0 0 $11. 0 0 $12. 0 0 $13. 0 0 $14. 0 0 $15. 0 0 $16. 0 0 $17. 0 0 $18. 0 0 $19. 0 0 $20. 0 0 0 $8. 0 $7. 0 0 $5. 00 $6. 00 0 $4. 0 0 $3. 0 0 $2. 0 $1. 0 $0 . 0 0 $0. 00 NPV Given Failure © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 26

VOI vs. Prospect A NPV Given Success Prospect A Sensitivity $4. 00 $3. 50 $3. 00 VOI(mm$) $2. 50 $2. 00 $1. 50 $1. 00 $0. 50 © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 27 00 00. $5 75. 00 00 $4 50. 00 $4 25. 00 $4 00. $4 75. 00 00 $3 50. 00 $3 25. 00 NPV Given Success $3 00. $3 75. 00 00 $2 50. 00 $2 25. 00 $2 00. 00 $2 75. 00 $1 50. 00 $1 25. 00 $1 00. . 0 0 $1 $7 5 . 0 0 $5 0 . 0 0 $2 5 $0 . 0 0 $0. 00

Portfolio Value Sensitivity – B First © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 28

Smith Exploration Prospect Drilling Order EVALUATION 2: DRILLING PROSPECT A FIRST

Evaluation Structure: Drill A First to Discern Reservoir at B © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 30

Prospect B: VOI Calculation Setup © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 31

Prospect B: Base Value The value of Prospect B with no more information (that is, without information from drilling Prospect A first) is 17. 3 mm$. As such, we would be prepared to drill Prospect B today, without any new information to upgrade the prospect. © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 32

Prospect B: Value of Perfect Information on Reservoir Presence from Prospect A The value of Prospect A increases 3. 8 mm$ with perfectly reliable information on the existence of reservoir from the information collected at Prospect A. © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 33

Reliability of Prospect A to Discern Reservoir Presence at Prospect B © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 34

Prospect B: Value of Imperfect Information on Reservoir Presence from Prospect A The value of Prospect B is unchanged with imperfect information on reservoir presence because we decide to drill the well even when information from Prospect A downgrades the chance of Prospect B. © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 35

VOI vs. Prospect B Reservoir Chance Prospect B Sensitivity 1. 8 1. 6 1. 4 VOI (mm$) 1. 2 1. 0 0. 8 0. 6 0. 4 0. 2 Prospect B Reservoir Chance © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 36 % 0. 0 10 0% 95. 0% 90. 0% 85. 0% 80. 0% 75. 0% 70. 0% 65. 0% 60. 0% 55. 0% 50. 0% 45. 0% 40. 0% 35. 0% 30. 0% 25. 0% 20. 0% 15. 0% 10. 0% 5. 0% 0. 0

VOI vs. Reliability of Prospect A to Interpret Reservoir Presence at Prospect B Sensitivity $4. 50 $4. 00 $3. 50 VOI (mm$) $3. 00 $2. 50 $2. 00 $1. 50 $1. 00 $0. 50 Reliability of Prospect A to Interpret Reservoir at Prospect B © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 37 % 0. 0 10 5% 97. 0% 95. 5% 92. 90. 0% 5% 87. 0% 85. 5% 82. 0% 80. 5% 77. 0% 75. 5% 72. 0% 70. 5% 67. 0% 65. 5% 62. 0% 60. 5% 57. 0% 55. 5% 52. 50. 0% $0. 00

Prospect B: Value of Perfect Information on Source Presence from Prospect A © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 38

Reliability of Prospect A to Discern Source Presence at Prospect B © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 39

Prospect B: Value of Imperfect Information on Source Presence from Prospect A © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 40

VOI vs. Prospect B Source Chance Prospect B Sensitivity $7. 00 $6. 00 VOI(mm$) $5. 00 $4. 00 $3. 00 $2. 00 $1. 00 Prospect B Source Chance © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 41 % 0. 0 10 0% 95. 0% 90. 0% 85. 0% 80. 0% 75. 0% 70. 0% 65. 0% 60. 0% 55. 0% 50. 0% 45. 0% 40. 0% 35. 0% 30. 0% 25. 0% 20. 0% 15. 0% 10. 0% 5. 0% $0. 00

VOI vs. Reliability of Prospect A to Interpret Source Presence at Prospect B Sensitivity $9. 00 $8. 00 $7. 00 VOI(mm$) $6. 00 $5. 00 $4. 00 $3. 00 $2. 00 $1. 00 Reliability of Prospect A to Interpret Source at Prospect B © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 42 % 0. 0 10 5% 97. 0% 95. 5% 92. 0% 90. 5% 87. 0% 85. 5% 82. 0% 80. 5% 77. 0% 75. 5% 72. 0% 70. 5% 67. 0% 65. 5% 62. 0% 60. 5% 57. 0% 55. 5% 52. 50. 0% $0. 00

Play Value with Prospect A First Prospect B Prospect A Perfect Information Imperfect Information Base Value 17. 3 VOI - Reservoir 3. 8 0. 0 VOI - Source 7. 7 2. 8 Base Value 6. 9 35. 7 27. 0 TOTAL PLAY © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 43

VOI vs. Prospect B NPV Given Failure Prospect B Sensitivity $9. 00 $8. 00 $7. 00 VOI (mm$) $6. 00 $5. 00 $4. 00 $3. 00 $2. 00 $1. 00 0 $9. 00 $10. 0 0 $11. 0 0 $12. 0 0 $13. 0 0 $14. 0 0 $15. 0 0 $16. 0 0 $17. 0 0 $18. 0 0 $19. 0 0 $20. 0 0 0 $8. 0 $7. 0 0 $5. 00 $6. 00 0 $4. 0 0 $3. 0 0 $2. 0 $1. 0 $0 . 0 0 $0. 00 NPV Given Failure (mm$) © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 44

VOI vs. Prospect B NPV Given Success Prospect B Sensitivity $7. 00 $6. 00 VOI (mm$) $5. 00 $4. 00 $3. 00 $2. 00 $1. 00 © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 45 00 00. $5 75. 00 00 $4 50. 00 $4 25. 00 $4 00. $4 75. 00 00 $3 50. 00 NPV Given Success (mm$) $3 25. 00 $3 00. $3 75. 00 00 $2 50. 00 $2 25. 00 $2 00. 00 $2 75. 00 $1 50. 00 $1 25. 00 $1 00. . 0 0 $1 $7 5 . 0 0 $5 0 . 0 0 $2 5 $0 . 0 0 $0. 00

Portfolio Value Sensitivity – A First © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 46

Portfolio Value Sensitivity Comparison © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 47

Insights to Smith Drilling Order Evaluation The reliabilities suggest there is more value in drilling Prospect A first: Prospect A adds 2. 8 mm$ to Prospect B n Prospect B adds 0. 0 mm$ to Prospect A n Benefit of drilling Prospect A first derived from the higher estimated reliability of Prospect A to help interpret the presence or absence of an oil source in Prospect B. n The recommendation assumes: The Smith team is willing not to drill the second well. n The decision metric is portfolio value. n Which well would you drill first? © 2012 Decision Frameworks LP. All rights reserved. Do not copy. 48