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Unformatted text preview: racterised by high risk and uncertainty and have a high initial investment without
the prospect of revenues for a significant period.
Commercially available software packages can be used to assist the decision-maker
with some of these steps. For example, Merak produces various tools such as Decision Tree™, Portfolio™ and PEEP™ (Petroleum Economic Evaluation Package)
which uses Crystal Ball™ to perform Monte Carlo analysis. DNV (Det Norske
Veritas) have developed a software tool, Easy Risk™, for preference theory analysis.
However, currently there is no single piece of software that allows the upstream
decision-maker to utilise all the tools in their toolkit. Through recently established
collaborative relationships, the major players (CSIRO (Commonwealth Scientific and
Industrial Research Organisation) Australia, Merak, Gaffney, Cline & Associates, 124 Wood Mackenzie and DNV) are now working together in an attempt to deliver to the
upstream investment decision-maker the definitive software tool.
This chapter has answered the first research question posed in Chapter 1 by presenting
the spectrum of techniques available to the industry for investment decision-making.
This is not intended to be a comprehensive study of the mathematics governing and
underpinning each technique. This is widely documented elsewhere. The aim here
was only to give an overview of the methods and indicate current theoretical
capability. Recent studies suggest that current practice is some way behind this
potential. However, this research has been limited and it is apparent there is a need
for a study that establishes common practice in upstream investment appraisal. The
following chapter addresses this issue. 125 Chapter Six Current practice in investment appraisal in the
upstream oil and gas industry 126 6.1 INTRODUCTION
There has been much research published on decision-making (for example, Ford,
2000; Gunn; 2000; Ekenberg, 2000; Markides, 1999; Harrison and Pelleteir, 2000;
Milne and Chan; 1999; Nutt, 1999; Burke and Miller, 1999; Papadakis, 1998; Dean
and Sharfman, 1996; Quinn, 1980; Mintzberg et al., 1976; Cyert and March, 1963).
The numerous qualitative studies that have been conducted are useful for providing
broad insights into the field of decision-making. However, very few of these studies
have examined the use of decision analysis in investment decision-making. Several
have focussed on the existence of formalisation and rationality in decision-making
(for example, Papadakis, 1998; Dean and Sharfman, 1996) but few have explicitly
examined the use, and usefulness, of decision analysis in investment appraisal
decision-making. Fewer again have considered cases where the decision situation is
characterised by a substantial initial investment, high (absolute) risk and uncertainty
throughout the life of the asset and a long payback period, features that are common
in, though not unique to, the petroleum industry. Typically, where such research has
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