Abstract

The petroleum industry is one of the most influential players in the world economy. The need to understand and assess the value in the oil and gas sector has never been greater than it is today. Over the next two decades the sector will need to invest substantial amounts of capital to meet the growing demand for energy which will involve rising cost pressure and competitive forces. Large scale of capital investment is required for most petroleum projects hence, it is important that investment decisions are based on a thorough analysis of variables and uncertainties. An ability to assess the viability of investments and the real value of oil and gas assets is critical to success where a range of complex technologies and facilities are required.

This paper examines the economics and system metrics application for upstream capital investment performance evaluation. Three capital investment choices (R, S, and T) were considered, using; the expected value analysis, decision tree analysis, stochastic dominance and @Risk tools.

Results show that stochastic dominance tests exposes the risk sensitivity of prospect R and S, opposing metrics results exposed the mutual exclusivity of the prospects and sensitivity analysis shows effect of uncertain dry hole probability on Expected Monetary Values (EMV). Therefore, for a strategic project selection, risk attitude of investor was introduced as a criterion for prospect selection between "R' and "S" and a range of dry hole probabilities (29% – 40%) was obtained for prospect "S".

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