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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...
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- Summer '14
- The Land