Abstract
Two conditions can occur in exploration problems that require that a corporation consider some form of insurance. First is the possibility of a catastrophic event occurring during exploration, for instance spilling oil, thereby involving massive and expensive clean-up costs. A corporation would surely like to take out insurance against this possibility. Second is the possibility that the regulatory agencies may consider a unilateral change in the environmental stringency conditions after the project is under way. In this case the corporation could be involved in further costs, thereby lowering potential profitability of a pre-existing contract. The corporation would surely like to option against the possibility of such an event occurring prior to the chance that the contract terms could be changed. These two forms of insurance are not equivalent. In the catastrophic loss event situation one would like to pay an insurance premium to cover the unknown catastrophic costs should they occur. In the regulatory stringency conditions situation, one usually knows ahead of time precisely how such more stringent conditions, if enacted, would influence the corporate profitability and one would like to have a contingency option operating that would be activated if and only if the regulatory agency does indeed enact the new more stringent regulations.