Calculating Probability and Profit for Drilling Wells: A Binomial Approach

  • Context: Graduate 
  • Thread starter Thread starter adeel
  • Start date Start date
  • Tags Tags
    Stats
Click For Summary

Discussion Overview

The discussion revolves around calculating the probability and expected profit associated with drilling exploratory wells using a binomial approach. Participants explore the implications of different probabilities for discoveries based on prior outcomes and the financial aspects of drilling.

Discussion Character

  • Technical explanation
  • Mathematical reasoning
  • Debate/contested

Main Points Raised

  • Alexander Da Costa & Priyanka Kapadia Petroleum plans to drill 5 exploratory wells with varying probabilities of discovery based on prior results, specifically 0.20 for the first 3 wells and 0.40 or 0.15 for the next 2 wells depending on earlier discoveries.
  • One participant questions whether "a discovery in the first 3 wells" refers to at least one discovery or all three wells resulting in a discovery.
  • Another participant proposes that the profit function could be represented as $3,000,000x - $2,500,000.
  • A participant expresses confusion regarding their calculations, noting that their expected standard deviation is significantly higher than their expected net profit, suggesting the possibility of negative profits.

Areas of Agreement / Disagreement

Participants express uncertainty regarding the interpretation of the discovery conditions and the calculations related to expected profits and standard deviations. There is no consensus on the correct approach or interpretation of the problem.

Contextual Notes

Participants have not resolved the assumptions regarding the interpretation of discoveries and the calculations of expected profit and standard deviation. There are indications of potential errors in the calculations that remain unaddressed.

Who May Find This Useful

Individuals interested in probability theory, financial modeling in exploratory drilling, and those seeking to understand the implications of conditional probabilities in decision-making scenarios.

adeel
Messages
45
Reaction score
0
QUESTION3:
Alexander Da Costa & Priyanka Kapadia Petroleum, plans to drill 5 exploratory wells. Jenny Wong & Danny Tieu Consulting geologists give the probability that a well results in a discovery as 0.20 for the first 3 wells. If there is a discovery in the first 3 wells the geologist's probability is 0.40 for the next 2 wells. Otherwise the geologists give a probability of 0.15 for the next 2 wells. Digging each well cost $500,000, and each successful well will result in a profit of $3,000,000 (before subtracting cost of digging the well),

a. Use binomial probabilities and a tree diagram to find the probability distribution of the number of discoveries.
b. What will be the expected net profit and the standard deviation?
c. Does the distribution in part a) agree with the binomial distribution for n=5, and p=0.20? Why? Why not?

--------------------------------
I have a few issues. When they say, If there is a discovery in the first 3 wells, does that mean 1 discovery in any of the first 3 wells, or discovery in all 3 of the first 3 wells.

Also, would the profit function be 3000000x - 2500000?

Help is greatly appreciatd
 
Physics news on Phys.org
cant anyone help me?
 
wont anyone help me?
 
Probably it means at least 1 discovery out of all 3 wells. Yes, that would be the profit function.
 
i tried it that way and somewhere i am making a mistake...my expected standard deviation is MUCH MUCH higher than my expected net profit. But i guess it might be alright since there is a chance of negative profits
 

Similar threads

What Are the Probabilities of Drilling Outcomes for an Oil Company?
  • · Replies 7 ·
Replies
7
Views
5K