Page 7: Portfolio considerations
At this phase of the investment decision a number of factors must be considered. The overriding goal of the company is to create shareholder value. In order to achieve the optimal growth for an acceptable level of risk the company invests on a portfolio basis. This means that it will invest in a number of different wells and at times share the costs and working interest with partners in order to improve the risk/reward balance and stay within a budget.
Because the returns of these individual wells are likely to be uncorrelated or weakly correlated (e.g. failure in one exploration well is unlikely to affect the chance of success of another) the risk of the overall portfolio is lower than that of an individual well. This is especially important at the exploration stage due to the high risk of failure.
In addition to this idea of investing in projects which help to reduce the overall risk profile of the company, decision makers must consider the strategic fit to the current business and where the company's skills and expertise lie. Only after considering all of these factors can a decision be made on whether or not to invest in a particular project.