economics · cashflow
Expected Monetary Value (EMV)
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Inputs
$
fraction
$
Description
Computes expected monetary value — the standard petroleum-exploration decision-tree risk metric, weighting a prospect's success-case NPV by its chance of commercial success and explicitly subtracting the sunk dry-hole cost weighted by the chance of failure. Also commonly called "Risked NPV" in industry usage — the same calculation under a different common name, not a separate metric (see limitations for the naive shortcut this deliberately avoids).
Variables
| Symbol | Unit | Description |
|---|---|---|
| EMV | $ | Expected Monetary Value |
| NPVₛ | $ | Net present value of the development project if the well is a commercial success — from npv_cashflow, npv_cashflow_variable, or an equivalent full economic evaluation. |
| Pc | fraction | Probability of commercial success (geologic chance of success combined with a minimum-economic-field-size threshold) — a pre-drill risk estimate, not a post-hoc judgment. |
| DHC | $ | Sunk exploration/drilling cost lost if the well is unsuccessful — the failure-case cost this calculator explicitly weights by (1−Pc), unlike a naive NPV×Pc shortcut that drops this term entirely (see limitations). |
Assumptions
- Exactly two outcomes are modeled: commercial success (value = NPV_success) and dry hole (value = −Dry Hole Cost) — for more than two discrete outcomes, use emv_multi_outcome instead.
- Chance of commercial success is a genuine pre-drill probability estimate, not a post-hoc adjustment.
- NPV_success is itself already a fully evaluated project NPV (pre-tax, per this discipline's standing convention) — this calculator does not compute it.
Limitations
- Deliberately does NOT use the naive "Risked NPV = NPV × Pc" shortcut, which silently drops the dry-hole-cost failure term — a known-unreliable simplification (aggregate single-factor probability-weighting of NPV alone, without an explicit failure-case cost, is flagged in risk-adjusted-valuation literature as producing materially wrong results, not just an approximation).
- A single aggregate chance of success is used; for a project with genuinely distinct, separately-resolving risk stages (e.g. appraisal then development), a staged/per-period probability model would be more accurate than this single-factor treatment.
- Does not itself derive NPV_success or the chance of success — accuracy depends entirely on the quality of those two inputs.
Use Cases
- → Prospect ranking: Rank exploration prospects by risk-weighted value to prioritize a drilling program, rather than by success-case NPV alone.
- → Go/no-go screening: Check whether a prospect's risk-weighted value justifies its exploration cost before committing to drill, given its estimated chance of commercial success.
Related Calculations
Region Notes
General
Chance-of-success estimates are prospect- and play-specific, typically built up from separate geologic risk factors (e.g. reservoir presence, trap, seal, charge) multiplied together — this calculator takes the combined Pc as a given input rather than deriving it from those individual factors.
References
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