Second it 185 sought to understand how these tools

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Unformatted text preview: ues. If necessary, perform a further sensitivity analysis here by altering the shapes of the probability distributions assigned to the economic factors and changing the nature of the dependencies between the variables. 7. Using influence diagrams draw the decision tree. 8. For each reserve case, recombine the chance of success estimated in step 1 and the economic values generated in step 6, through a decision tree analysis to generate EMVs. 9. Use option theory via decision tree analysis and assess the impact on the EMV. Figure 5.12: A 9 step Approach to Investment Appraisal in the Upstream Oil and Gas Industry Variations of the approach could be used for development decisions, any production decisions and for the decision of when to abandon production and how to decommission the facilities. Versions of it could also be used in other industries with a similar business environment to the oil and gas industry, for example, the pharmaceutical or aerospace industries. In these businesses, investment decisions are similar in scale to the oil industry with the high initial investment without the prospect of revenues for a significant period and are also characterised by high risk and uncertainty. The second research question focussed on two issues. First, it aimed to establish which of the decision analysis techniques that the researcher had identified to comprise current capability in answering the first research question, upstream oil and gas companies actually choose to use to make investment decisions. Second, it 185 sought to understand how these tools are used in the process of organisational investment decision-making. Previous studies into the usage of decision analysis techniques had suggested that there was a gap between current practice and current capability (for example see studies by Arnold and Hatzopoulous, 1999; Carr and Tomkins, 1998; Schuyler, 1997; Buckley et al., 1996 Fletcher and Dromgoole, 1996; Shao and Shao, 1993; Kim, Farragher and Crick, 1984; Stanley and Block, 1983; Wicks Kelly and Philippatos, 1982; Bavishi, 1981; Oblak and Helm, 1980 and Stonehill and Nathanson, 1968). It appeared that whilst the literature described some very sophisticated investment appraisal tools, companies were choosing to use only the most simplistic. However, most of the earlier studies had tended to utilise quantitative methodologies and, as such, these works had only been able to provide an indication of how widely used a particular decision analysis technique was (for example, Schuyler, 1997). They had not provided any insights, based on behavioural decision theory, into the reasons why some techniques fail to be implemented and others succeed, and, more importantly, which techniques perform better than others do (Clemen, 1999). In adopting a qualitative methodology, the current study was able to address these issues. Earlier qualitative research into organisational decision-making had neglected the role of decision analysis. Several studies had focussed on the existence of formalisation and rationality in decision-making (for example, Papadakis, 1998; Dean and Sharfman,...
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This document was uploaded on 03/30/2014.

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