It will be compared with current practice in chapter

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Unformatted text preview: nge of decision analysis techniques that are applicable to the upstream oil and gas industry for investment appraisal decision-making. This constitutes current capability in investment appraisal in the upstream. It will be compared with current practice in Chapter 6 and used in Chapter 7 to construct a ranking of companies according to the sophistication of their investment appraisal approach. There are numerous tools described in the decision theory and industry literatures for investment appraisal decision-making. All the techniques presented in this chapter allow risk and uncertainty to be quantified and have been applied to upstream investment decisions in the literature. Each of the techniques has limitations, so that reliance by decision-makers only on the output from one tool for investment decisionmaking is inadvisable. By combining the output from a variety of tools, the decisionmaker is more likely to assess the risk and uncertainty accurately. The techniques described in this chapter all use similar input and, hence their use together does not place unnecessary strain on the resources of an organisation. The other tools described in the literature (for example, the analytic hierarchy process (Saaty, 1980) and Markov chain analysis (Das et al.¸1999)) have either not been applied to the upstream in the literature, or the input they demand and, in many cases, the output they produce, is not complementary to the other investment techniques currently used by organisations. Hence their use would represent a significant amount of additional work for organisations. For these reasons, the tools described in this chapter, the researcher believes, comprise the toolkit currently available to the upstream investment decision-maker. The chapter begins by presenting the decision analysis techniques described in the industry and prescriptive decision theory literatures. Fundamental to decision analysis are the concepts of expected monetary value (EMV) and decision tree analysis. They are widely applied to investment decision-making in the oil industry (see Chapter 6 73 and studies by Schuyler (1997), Fletcher and Dromgoole (1996) and Newendorp (1996)). The chapter proceeds to explore the other techniques in a similar manner. Following this there is a discussion of how these techniques could be used by the upstream for investment appraisal. This indication of current capability is then used as input into Chapter 6, where current theory in investment appraisal in the upstream is compared with current practice. (It is important to note that in this chapter descriptions of standard techniques are referred to, rather than reproduced. Where necessary, the reader is referred to the relevant literature for further details.) 5.2 THE CONCEPTS OF EXPECTED MONETARY VALUE AND DECISION TREE ANALYSIS A general understanding of the oil industry can be gained from the process model shown in figure 5.1. In particular it highlights the extent to which investment appraisal decisi...
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