Commercial uncertainty is defined to be given that

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Unformatted text preview: tiate between geological risk and uncertainty and commercial risk and uncertainty. Such organisations define geological risk to be the chance of there being any hydrocarbons and they perceive geological uncertainty to be the range of possible volume outcomes given there is some hydrocarbons. An EMV can then be calculated for the decision to drill. Once the presence of hydrocarbons has been detected the focus then shifts to commercial risk and uncertainty. Commercial risk is defined to be the chance of the field producing enough hydrocarbons to be commercially viable in the current and future economic climates. Commercial uncertainty is defined to be, given that the field is commercially viable, the possible range of outcomes. An EMV can be calculated again at this stage. As the following interviewee indicates, decision-making criteria appear to move in and out of favour with management: “[We] use all of these. This one [EMV] is used most heavily here in exploration than anywhere else. … Yes we use all these. NPV is the one that we pay most attention to. ROR gets people excited from time to time. They just sort of disappear and come back again a couple of years later.” (N1) As stated in Section 5.2 of Chapter 5, the EMV of a decision alternative is interpreted to mean the average monetary profit per decision that would be realised if the decision-maker accepted the alternative over a series of repeated trials. The EMV decision rule then holds that provided the decision-maker consistently selects the alternative that has the highest positive EMV, then the total net gain from all decisions will be higher than the gain realised from any alternative strategy for 131 selecting decisions under uncertainty. If decision-makers in the upstream vary the decision-making criterion they use to choose exploration prospects, then they are failing to satisfy the repeated trial condition of the EMV decision rule. This occurs in some organisations because there is a misunderstanding at board level of what EMV really means as the following respondent illustrates: “[There is a lack] of understanding of what EMV means. People look at an EMV and think that is the value of the prospect not recognising that it is the aggregated expected value of the various outcomes. … I’ve got a classic one here. I showed to the board a portfolio of 9 major projects. All of which had their own risk and uncertainty and they’re highly related in that one or two of them controlled whether or not others of them would go ahead. So if one of them didn’t go ahead, for instance, there was a little satellite that wouldn’t go ahead too. So you put it all together in a decision tree, you roll it all up and you calculate an EMV and associated with that EMV there are other things like expected CAPEX. And they looked at it and said “mmm not very good is it. It means our company is only worth £50 million.” And you say, “Nah, you’re wrong. What we are saying is if you did them all, you could expect at the end of the day some failures and some good ones and that’s your value. If you get clever and do the good ones first, you may already find that you’ve got £100 million in your pocket and the clever thing to do is then...
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This document was uploaded on 03/30/2014.

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