A Binomial Approach to Selecting Optimum Working Interest: Corporate Risk and Corporate Confidence III. Ignorance is Not Bliss

This third paper in the series is concerned with the situation in which one has virtually no idea whether an exploration opportunity is likely to be a money winner or just awful. Using a variant of the binomial method accounting for the probability that a well will result in successful hydrocarbon finding after a series of dry holes, we show that one can assess the corporate confidence and associated optimum working interest one should take in such an exploration opportunity when one ignores all information about the net present value (NPV). When a corporation wishes to modify the basic pattern to allow for an NPV, and to include a required corporate worth for the opportunity, we show how the corporate confidence and/or the optimum working interest have to be altered to allow for such a factor. When the corporation knows only a low value for the NPV, which is unprofitable, and a high value, which is extremely profitable, we show how one can incorporate this broad range of possibilities within the same binomial framework to assess the likely distribution of optimum working interest (for a fixed corporate confidence) or corporate confidence distribution (for a fixed working interest) for choices of corporate required worth. These calculations allow a corporation to be more sharply focused on the working interest it might wish to take in relation to its corporate confidence that the unknown opportunity NPV might just turn out to be highly profitable, without overly committing too great a fraction of the corporate resources to such speculative ventures.