Wildcatdrilling

Most drilling takes place in or near known fields, where geology and past output give a good guide to what will be found. A wildcat well is drilled far from any existing production, using seismic surveys and geological models as the only evidence that hydrocarbons might be present.

The well is a test of the idea, and the answer is often "no". The costs are large and come first.

A company must pay for leases, surveys, rigs and crews long before it knows if it has found anything. If the well turns out dry, those costs are written off, and if it finds oil or gas, the company then spends much more to appraise and develop the field.

Because of this risk profile, wildcat drilling is usually funded by companies and investors who can afford to lose the money. Larger firms spread the risk across many wells, and smaller firms often sell shares of a well to partners in a joint venture, which divides both the cost and the reward.

Investors in such projects should expect an all-or-nothing outcome for each well. In accounting, companies follow rules on how to treat exploration costs.

Under the "successful efforts" method, the cost of a dry hole is expensed immediately, while under "full cost" accounting, exploration costs are added to the balance sheet and written down later. The choice affects reported profits and makes comparisons between oil companies tricky.

The phrase "wildcat" is also used more widely for risky, unproven ventures, as in wildcat banks of the past or wildcat strikes. In finance it keeps a specific meaning in energy and mining, where companies talk about their exploration success rate and how many wells find commercial quantities.

A better term for the broad idea is early-stage venture risk.