A Binomial Approach to Selecting Optimum Working Interest: Corporate Risk and Corporate Confidence

Current methods for determining the optimum working interest (OWI) one should take in an exploration project are beholden to underlying basic utility theory. As such they suffer from the generic consequences that: the OWI is never guaranteed to be always less than unity as it must be; that the OWI does not always increase as the net present value of a project is increased as it should; and that the OWI is automatically set to zero when the expected value of the project is less than zero, despite there being an uncertainty on the expected value that could still allow a profitable outcome. As a consequence of these drawbacks, here we set up a binomial procedure for ascertaining the OWI, which method does not suffer from any of the utility-based problems. Several illustrations indicate how the binomial enhancement operates in reality. In addition, one can also compute the corporate confidence in a project using this new approach, and determine the corresponding apparent confidence of any utility-based procedure for determining OWI. This binomial procedure for determining OWI and corporate confidence is, therefore, a reasonable alternative over previously available methods.