Table 1.

Examples of Type 1 and Type 2 Decisions in Petroleum Exploration

Decision TypeExample(s)
Type 1a: adjustable cost of failureCompetitive bidding of cash price for an exploration lease; farm in with biddable promote level
Type 1b: adjustable reward of successProduction sharing contract on undrilled prospects with biddable split factor*
Type 2: fixed terms, with nonoptional cost and rewardDecision to drill an already-licensed prospect,; licensing a block with drilling commitment to defined prospects; farm in on fixed terms
  • * Johnston (2003).

  • Capen et al. (1971).

  • Lohrenz (1987).