And if you take a very simple approach to prospect

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Unformatted text preview: to stop gambling and go somewhere else … Right?” And again I was always taught positive EMV no matter the magnitude it’s good news? But they were looking at the magnitude as being an indicator of success.” (D) In other organisations, as the following interviewee explains, it is not misunderstanding of EMV but the lack of multiple prospects that makes the EMV decision rule impossible to adhere to: “I mean for prospect analysis I think it is pretty standard to use an EMV approach which is essentially … the weakness in the EMV approach, any decision tree approach, is that the value that comes out maybe actually a value that will never actually occur in practice. And if you take a very simple approach to prospect analysis which I think a lot of companies do. This two outcome model either a dry hole or a success of a certain size. Then what you say is either a) I am going to lose $10 million or b) I’m going to make $100 million. The EMV will come out at let’s say $20 million or $6 million. But that’s not going to occur. You are either going to lose 10 or make 100. So how can that represent that decision? Of course if you talk to people like Newendorp who published on this years ago, he would say of course it’s a nonsense you can’t use it for that. You can use it as a comparative tool. If you’ve got a lot of prospects, you’ve got a statistical database and over time it will come out. You’ll achieve EMV. Then I come back to this problem … what if I only have one prospect, I don’t have a statistical sample here that I can play with, how can I value it? Well I can’t think of another way of doing it. So it is a way of doing it but I have never been entirely happy with it.” (Q) 132 Perhaps these observations help to explain why in this study, like Schuyler’s (1997) earlier work, so many of the respondents reported difficulty in knowing whether a project would be approved or not. Many of the professionals interviewed admit to being confused about their company’s decision policy. Most are unsure about how their company policy might make trade-offs among different decision criteria: “I don’t know which ones are used for which decisions.” (F) Indeed one respondent commented: “[The approach] changes annually, monthly, daily and also vertically, often with a change in chief executive.” (R2) The misunderstandings of decision-makers and the process by which they actually make investment decisions are issues that will be discussed further in section 6.3. The focus in this section is on those decision analysis techniques that companies choose to use for investment appraisal. In this regard, the level of awareness and usage of Monte Carlo by upstream organisations will now be discussed. • Risk analysis using Monte Carlo simulation Awareness of Monte Carlo simulation in the upstream is high. All but one of the respondents recognised the technique and it is widely used to generate estimates of prospect reserves. From the resulting probabil...
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