There are some particular advocates here but nobody

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Unformatted text preview: . However, in this study those smaller companies that were aware of the technique had rejected its implementation because they believed they had insufficient properties to constitute a “portfolio”: “We tend not to be spoilt for choice for investment opportunities. …We don’t tend to need to rank development opportunities either in terms of risk or reward because we have pretty much only got one or two going at any one time. ...Portfolio theory would certainly be more valuable in a bigger company than ours.” (N1) 138 • Option theory Very few of the respondents were aware of real option theory, and in all cases of awareness, the interest had not translated into use. The companies reported finding the technique very complicated and the theory difficult to grasp. This comment from one respondent was typical: “Option theory we’ve been getting, not me personally, but people have been getting excited about option theory but I think it’s run a bit out of puff a little bit here at the moment. There are some particular advocates here but nobody has been able to demonstrate it at least here, that on the ground and in practice, it is very helpful. Whether that’s right or not, I don’t know” (N1) • Preference theory Only four of the respondents were aware of preference theory and none of them reported using the technique as part of their investment appraisal decision-making process. The majority was of the opinion that it would be: “…difficult to convince the hard-nosed asset manager that they should use such a process.” (N1) Usually their level of knowledge of the technique was based on attending a workshop or seminar by consultants where the technique had been reviewed. The reason that option and preference theories and, to a lesser extent, portfolio theory, are so rarely used by organisations is explained by one of the representatives of company N: “…There’s a lot of interesting things at the conceptual level but when it comes down to standing in front of the directors and trying to help them make a better decision regarding an issue, there’s a subset I think of these tools that are useful in doing that. …Monte Carlo and decision trees are about as far as it goes here.” (N1) The observations in this section have indicated which techniques are being used by organisations in their investment appraisal decision-making. For exploration decisions, most companies use Monte Carlo simulation to generate estimates of 139 prospect reserves. They then run their economic models on only one reserve case. Typically, Monte Carlo simulation is not used for economic analysis. In production decision-making, the majority of companies only use deterministic analysis. Option, portfolio and preference theories are hardly used at all by any firm. Comparing this approach with the 9-step approach outlined in figure 5.12 (Section 5.7 of Chapter 5), this study has clearly confirmed suggestions from the earlier empirical research, and established, unequivocally, that there is a gap between current theory and current practice in the quantitative techniques used in investment appraisal in the upstream oil and gas industry. The following section builds on the discussion above. I...
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