10 probabilistic production economics follows from 8

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Unformatted text preview: e three cases but usually only use one reserves case for economic modelling, the company will be given one point. When the economic models are purely constructed on one reserves case, these companies will be given no points. 7 EMV via decision tree analysis. The value of calculating an EMV through a decision tree is widely acknowledged in both the industry and decision theory literatures. Two points will be assigned to companies that use decision tree analysis to calculate an EMV routinely in their investment appraisal process and have appropriate training for employees in how to construct decision trees and calculate EMVs. One point will be given for partial implementation, and zero for non-usage. 8 Probabilistic prospect economics. Since, firstly, the technology exists for automated probabilistic economics, and secondly, it is widely documented that economic variables are volatile, companies ought to be producing probabilistic prospect economics. However, producing probabilistic prospect economics can 164 be complex since there are many economic variables to consider with many dependencies between them. The necessity to produce probabilistic prospect economics is receiving increasing attention in the industry literature (for example, Bailey et al., in press; Simpson et al, 1999; Lamb et al., 1999; Snow et al., 1996) and the output that is produced explicitly recognises the existence of risk and uncertainty in economic estimates. 9 Probabilistic production reserves. Following the same rationale as 8, companies ought to be explicitly recognising the risk and uncertainty in estimating production reserves by using probabilistic analysis. 10 Probabilistic production economics. Follows from 8 and 9. 11 Portfolio theory. Markowitz has shown how a diversified portfolio of uncertain opportunities is preferable to an equal investment in a single opportunity, or restricted portfolio of opportunities, even if the diversified portfolio contains projects that are more risky than any other project in the restricted portfolio. Authors such as Ball and Savage (1999) have taken this concept and applied it to the upstream oil and gas industry, showing how diversification in terms of geographic or geological setting, in product pricing mechanism (gas versus oil), production profile timing, political environment, and the avoidance of specific niches can, when the alternatives have a negative correlation, have a positive impact on the risk/reward balance of the company’s investments. It is clear, then, that when considering an incremental investment, its impact on the total portfolio should form an important factor in the decision-making. Portfolio theory has been applied to the upstream industry in the literature for several years and whilst the concepts are relatively simple the mechanics of the technique are complex. This makes implementation more difficult. There is software produced to automate its use. 12 Option theory. There are four significant characteristics of most o...
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This document was uploaded on 03/30/2014.

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