Geothermal handbook: PlanninG and Financing power Generation t e c h n I c a L r e p o r t 2 / 2

“The wildcatter Problem”— when to Test and when to Invest
The “wildcatter problem” that analyzes this set-up was formulated by Howard Raiffa (1968), using 
drilling for oil as an example. The principles he developed can equally be applied to exploration 
for geothermal resources. In this model, the wildcatter is assumed to have made a prior probability 
assessment which determined that production drilling would be successful (there is a viable resource). 
A test is also available (seismic or exploratory drilling) at a known cost that will provide certain 
information about the presence or absence of a viable resource.
iv 
A central concept is that of adopting 
the combination of choices that would appear, based on current knowledge, to give the maximum 
expected value of the outcome—that is, to maximize the average benefits of the decision by weighting 
different possible outcomes of that decision by the probabilities of those outcomes. 
iv
This is the case of “perfect information”. The more complex case of “imperfect information”, where the test increases information about the 
probability of a viable resource, but does not confer certainty, is also able to be analyzed by similar methods to that described below.
A n n e x 2

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G e o t h e r m a l H a n d b o o k : P l a n n i n g a n d F i n a n c i n g P o w e r G e n e r a t i o n 
The approach is demonstrated with some purely illustrative numbers. The net benefits of successful 
drilling for geothermal are 300 (reduction in costs of the expansion plan); the cost of investment in 
a geothermal plant is 100; and the prior probability, before carrying out the test, of finding viable 
resource is 0.2 (the wildcatter believes that there is a 20 percent chance of being successful). The 
cost of the test that will demonstrate with certainty the presence or absence of a viable amount of the 
resource is denoted as K.
The problem is solved with the aid of a decision tree that lays out the various options open to the 
wildcatter and, for each option, the possible outcomes and the prior assessment of the probabilities 
of those outcomes. The first option on the tree is whether to test or not. The test is assumed to provide 
perfect information so that a “success” would guarantee that production drilling will find adequate 
resources for the generation project—as a result, investment can go ahead. A failure on the test would 
indicate that adequate resources do not exist and so no investment should take place. 
If, instead, the first decision was not to undertake the test, a second decision on whether to go ahead 
with the project would still be required. A decision to go ahead could lead to a success with its 
attendant benefits, while a failure would have incurred the investment costs but no benefits. The final 
alternative would be not to test and not to invest (the base case against which other cases can be 
judged). 
v
In practice it is likely that a program of several exploratory wells would be drilled, and that certainty would be equated with a given number 
(for example, at least two out of four) indicating the presence of a viable resource.
WET p=0.2
WET p=0.2