One point will be given if they have any definitions

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ical average, in the North Sea, of about seven years between initial exploration expenditure and commitment to develop, with another three or four years to first production and then twenty years of production revenues before abandonment expenditure. Recognition of this, and of the time value of money, means that DCF techniques (see, for example, Brealey and Myers, 1996) must be used by upstream companies. DCF is relatively easy to conduct, its usefulness to the upstream well documented and the output it produces simplistic. Two points will be assigned where companies use DCF techniques routinely in their investment appraisal process and have appropriate training for employees in how to use the tool. One point will be given for partial implementation, and zero for non-usage. 4 Risk and uncertainty. In Section 2.2 of Chapter 2 the literature review indicated that there are numerous definitions of risk and uncertainty presented in the literature and that the conceptualisation that decision-makers adopt affects the method of coping that they (and their organisation) adopts. Clearly, then companies ought to have corporate definitions or, at least, a tacit organisational understanding of the terms risk and uncertainty, which are complementary to their approach to investment appraisal. Risk and uncertainty have received much attention in the industry literature and numerous definitions proposed for organisations to select from. The definitions ought to be easily applied via training or workshops. Companies will be assigned two points if they have organisation-wide definitions or understandings, of the terms that fit with their approach to investment appraisal. One point will be given if they have any definitions or tacit understanding at all and no points will be allocated if the company has no definition or understanding of the concepts of risk and uncertainty. 163 5 Monte Carlo for prospect reserves. Chapter 5 provided a discussion of the benefits of using risk analysis via Monte Carlo simulation to generate a probabilistic estimate of recoverable reserves. Simulation has been applied to reserve evaluation in the literature for many years and software now exists to make this process relatively simple. The output produced by the simulation is a probability distribution of the recoverable reserves. Organisations that adopt this approach for prediction of recoverable reserves are explicitly recognising the existence of risk and uncertainty in these estimates. Companies will be given two points if they routinely use Monte Carlo simulation to generate estimates of prospect reserves. One point will be assigned to those organisations that occasionally used the technique and no points will be allocated for non-usage. 6 p10, p50 and p90 reserve cases for economic modelling. Three reserve cases should be used as input into their economic modelling since they are representative of the best, worst and most likely outcomes. Those companies that use the three reserve cases specified above will be assigned two points. Where organisations occasionally use th...
View Full Document

Ask a homework question - tutors are online