| Ps vs Po (Exposed Capital) |  |
Ps vs Po (Exposed Capital)
2) Capital is “Exposed” when the exposed check box is selected in the Capital Data Dialog for a specific capital item. This capital might include a land purchase, or your exploration costs. These types of cost are not risked in the case of a Ps.
Let’s look at an example of a $10 million dollar exploration well with additional facilities capital of $2 million if the well is successful. Let’s assume that our chance of success is 90%.
Ps=0.9, exploration capital = 10 (this is exposed capital), Facilities Capital = 2.
Our risked capital would then be 1.0*10 + 0.9*2 = 11.8 million.
3) Q: Are Ps and Po applied cumulatively?
A: Yes. Ps and Po are both applied to an asset or node if they are both checked. Ps applies only to “non-exposed” capital. For capital that is marked as “exposed”, the probability is by definition equal to one (Ps=1). In other words, exposed capital will always be spent at its full value in the case of a Ps. Po, on the other hand, treats all capital the same.
Suppose that, in the above example, there is a 50% chance of acquiring the lease. Then Po=0.5 applies to the previous risked capital giving a final risked capital of 0.5*11.8 = 5.9 million.
4) Q: Why would you apply risk BEFORE primary calculations versus AFTER primary calculations?
A: Applying risk before or after primary calculations is an option to accommodate facility sizing. Applying risk before primary calculations will push lower (risked) volumes through the facilities. This is only relevant if you are taking advantage of WellSpring’s volume constraints in your facility network, or if you are “auto-adding” capacity to your facilities.
Any time that you want WellSpring to apply risk to incoming data, you need to set this flag to "Apply factors AFTER primary calculations". "Apply factors BEFORE primary calculations" is the default and generally need not be altered if risk factors are defined only at wells.
If you specify the risk at a node instead of only at wells, a change from the default setting may be appropriate. If you had a multi-well exploration development, and you were confident that there was economic production, but not sure how big the field might be, you would want to apply risk before primary calculations, and to size your facilities according to those risked volumes.
In a project where there is only a single well, or very few, then you would generally use “Apply risk AFTER primary calculations”. The reason is that if a well is successful, then you will have to design your facilities to handle the un-risked volumes. For example if you select “BEFORE”, Ps is only 10% and you have only one well, then your facility constraint would be applied on only 10% of the potential success volume, and you could potentially undersize your facilities.
5) Q: When would you use the “Apply Ps and Po AFTER Risk to all inflowing Assets”?
A: This setting is checked when you want to apply the risk specified at the node to any incoming assets. In other words, the risk is cumulatively applied. If you had an exploration well with its own risk, and it was flowing into another risk node, then you would use this option. If you do not check this option, then any risk at this node will be applied only to values at this node, and nothing flowing into it.
6) Q: When would you use the “Convert Ps to Po” for incoming capital data?
A: This setting would generally be the default. In essence it treats incoming exposed capital as non-exposed at this node. It is used when capital is no longer exposed at an upstream node in a project. For example, if you had an exploration play where you had a 40% chance of finding a prospect on seismic, and then a 20% chance of success of drilling the exploration well. You could set up the project so that the well is risked and is flowing into a seismic node, where you have a 40% risk applied. The exposed capital from the exploration well, is no longer exposed at the seismic node, so you would “convert Ps to Po” for the incoming capital.
See also