What Is an Exploration Cost?

Malcolm Tatum

Exploration cost is a type of expense that is incurred when a business entity invests resources into locating and securing resources for use within the business operation. Most commonly, the term has to do with the activities of companies that provide goods and services based on the use of oil, natural gas, or some type of mineral. Within this scenario, the exploration costs are usually connected with the expense of identifying locations to drill for the resources sought, as well as any actual drilling costs that may be incurred up to the point of actually finding the substances desired.

Man climbing a rope
Man climbing a rope

A number of different types of expenses can go into the overall exploration cost associated with a specific project. Any expenses incurred in terms of researching possible sites for drilling, such as the cost of laboratories and field researchers, is often included. In addition, the cost for any equipment used in the research effort will be part of the overall expense. When and as the research indicates that drilling is viable, the cost of moving the equipment into position, hiring labor to manage the drilling operation, and even the gasoline or electricity needed to operate the rigs will also be considered part of the exploration cost.

Unlike some other types of business expenses, exploration cost may or may not be recouped by the company. In some cases, the cost of the research to locate possible drill sites and the subsequent cost of setting up drill rigs and attempting to recover the minerals or other desired substances will yield only a small amount of return that is not sufficient to offset the total cost. In the worst case scenario, the drilling fails to yield any results at all, meaning that all the labor, transport, and equipment costs associated with the project is a total loss for the company.

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In order to avoid situations in which exploration cost is not offset by the returns, many companies rely heavily on advance research to qualify drill sites. This may include investing in some field research at the site to make sure there is evidence that some sort of yield is highly likely. By choosing to not pursue any sites that are not anticipated to provide an acceptable amount of return in term of product yield, the company is to able to keep exploration cost somewhat low and be able to offset the cost of the failed project with profits generated from more successful drills at other locations.

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