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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
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
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
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This document was uploaded on 03/30/2014.
- Summer '14
- The Land