They then run their economic models on only one

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Unformatted text preview: 1996) but few had explicitly examined the use, and usefulness, of decision analysis in investment appraisal. Fewer again had examined cases where the decision situation is characterised by a substantial initial investment, high (absolute) risk and uncertainty throughout the life of the asset and a long payback period, features that are common in, though not unique to, the petroleum industry. Typically, where such research had been undertaken, it had usually been conducted within one company usually by an employee of that organisation (for example, Burnside, 1998) and had often not been published due to commercial sensitivity. There had been only one previous qualitative study researching the use of decision analysis in the oil industry (Fletcher and Dromgoole, 1996). However, this study had only focused on the perceptions and beliefs of, and decision analysis techniques used by, one functional area within organisations in the upstream. As such its findings could only be regarded 186 as indicative rather than conclusive. In contrast, the current study integrated perspectives from individuals from a variety of backgrounds within organisations. In doing so, the research was able to produce a description of current practice in investment decision-making in the oil industry that was informed from the perspectives of the main participants in the process. The current study indicated that for exploration decisions, most companies use Monte Carlo simulation to generate estimates of 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 and reprinted above, confirms the suggestions of earlier empirical research, and establishes that there is a gap between current theory and current practice in the quantitative techniques used for investment appraisal in the upstream. The research interviews were then used to provide insights into the reasons for the gap between current practice and capability. It appears that there are relationships between decision-makers’ perceptions of decision analysis, company culture and the extent to which decision analysis is used for investment appraisal decision-making. In companies where managers are convinced about decision analysis, the culture is “numbers-driven” and decision analysis is used extensively. In companies where managers are unconvinced about the value of decision analysis, the company is largely “opinion-driven” and the use of decision analysis is not formalised or encouraged. These ideas were then captured in a model of current practice. The x-axis in the model relates to the number of decision analysis techniques used for investment appraisal decisions. The y-axis of the model indicates the proportion of investment decisions that are made in each company using decision analysis techniques. Plotting the interviewed companies on the two axes then produces the model shown in figure 6.1 and reprinted here. The pattern obtained suggests that organisations begin to use decision analysis techniques on routine...
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This document was uploaded on 03/30/2014.

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