In the last 10 years, oil and gas drilling deals have focused on wells that will use either a large fracture treatment or a horizontal borehole for developing oil and gas resources that are already known to exist in a rock that has poor quality flow characteristics (low permeability).  

The main selling point of a fractured or horizontal well deal is its high drilling success rate.  Because the well will be drilled at a location where the oil or gas is already known to exist, it is just a matter of getting the oil or gas out of the ground.  Almost all wells in these "resource plays" are completed as producers, nearly eliminating the dryhole risk.

But a drawback to a well drilled in a poor quality reservoir is the high cost of the fracture treatment or the horizontal drilling.  A gas well sounds financially lucrative when it is reported as having 2 bcf of gas reserves, initial production of 2,000 mcfd, or finding and development costs of less than $2 per mcf--- but when you account for drilling and completion costs upwards of $2 million and a steep first-year production decline rate (commonly 50-70%), the resulting return on investment may be less than the return from a fairly conservative stock market mutual fund. Consequently, the high initial cost of these types of wells creates a new type of risk for today's oil and gas investor:  the risk that the well may provide a return that is less than a simpler type of investment such as a mutual fund.

The goal in oil and gas well investing is not to avoid all risk. The goal is to manage risk by taking only those risks that are justified by the potential return on investment.  A key factor in the investment decision-making process for oil and gas drilling is the timing of expected cash flows. Depending on the intial production rate and the decline rate, a well that produces most of its reserves in the first two years of production (like fractured or or horizontal wells) can either underperform or significantly outperform the long-term rate-of-return from an alternative investment.  The investor wants to manage risk by avoiding an investment in a well that will be completed as a "successful" producer, but is an economic failure because it either does not produce enough oil or gas to pay for the cost of drilling or it produces so slowly that its return on investment is not much better than a less-exotic alternative investment such as a stock market mutual fund.

The most widely used single number for combining risk and the timing of cash flows in an economic evaluation of an oil or gas well is the risk-adjusted net present value (NPV).  Risk-adjusted NPV puts two contrasting investments on a level playing field, so they can be directly compared, despite their different risks and different timing of cash flows.  Using risk-adjusted NPV gives the investor an objective, systematic approach for making an oil or gas well investment decision.