Abstract

Interviews have been conducted with decision-makers in most of the operating companies active in the UK North Sea. The data generated by these interviews defines industry current capability in decision analysis. The extent to which each company uses the techniques which comprise current capability defines a rank list representing relative level of sophistication in decision analysis. This rank list is then correlated with other rank lists based on common measures of business performance to establish the value, to companies, of adopting best (or, at least, better) practice in decision analysis. The strong positive correlation found indicates a considerable incentive for companies to upgrade their decision analysis capability.

Introduction

It is contended in this paper that sophistication in decision making techniques is a source of competitive advantage among operating companies active in the upstream oil and gas industry in the United Kingdom Continental Shelf (UKCS). This contention is investigated by analysing information extracted from 36 semi-structured interviews with individuals working within companies active in the UKCS. Industry level capability is described and companies are allocated a rank according to the relative level of sophistication in decision making. The rankings are then correlated with performance measures. If decision analysis is a source of competitive advantage, then a positive correlation should be observed between the use of decision analysis and commonly used measures of success.

A common assertion in the management literature is that the most challenging decision business executives face is choosing among alternative capital investment opportunities.1 This is because the decision maker must choose a single course of action from among those available to him, even though the consequences of some, if not all, the possible courses of action will depend on events that cannot be predicted with certainty.2 Therefore, an essential element in investment appraisal decisions is an assessment of risk and uncertainty.3–7 In the petroleum industry, the risks and uncertainties are so large that the industry has been cited as providing a classic illustration of the benefits of decision analysis.2 In recent years, factors such as the decline in discovery volumes and reserves replacement ratios, increasing marginal costs, the steady rise in world production and the effects of low oil prices on exploration activity levels have emphasised the risks and uncertainties.8,9 As a result, there is an increasing perception in the upstream oil and gas industry that there is a need to improve techniques for understanding, analysing and managing risk and uncertainty within decision making processes. However, industry common practices in appraisal and capital investment analysis have not kept up with the advances in theory and computing tools.10 It is possible that at least one reason for this is the lack of empirical evidence correlating the use of decision analysis with success and this paper aims to address this gap.

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