The Oil Drum

12 comments on Why use a 5-year window?

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knightrd on September 18, 2005 - 10:34am

Insurance adjustors have tools like mortality tables to figure out whether someone is a good risk or not. Based on age they can figure out the probability that you will live long enough to pay enough into your policy.

Now, I realize oil projects are different beasts. However, I would think that we could come up with a way to obtain a probability estimate for a project's: a) chance of starting on schedule b) hitting peak production.

We have a lot of historical data for this sort of thing.

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ericy on September 18, 2005 - 11:08pm

The problem is that if you are doing mortality of people, that you will have a large enough sample you can be pretty sure that actual mortality will be pretty close to the actuarial tables.

If you had thousands of oil projects, the hurricanes and wars could be dealt with in terms of probabilities, but there are just a handful of projects - not enough that one can rely upon statistics like this.