Risk, Uncertainty and Investment Decision-Making in the Upstream Oil and Gas Industry Fiona Macmillan ma hons (University of Aberdeen) October 2000 a thesis presented for the degree of Ph. D. at the University of Aberdeen declaration
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Preference, or utility, theory. As indicated in Chapter 5, this aspect of decision-making recognises the fact that companies (or, indeed, decision-makers within companies) do not all have the same attitude towards money. For example, a smaller company will be much less able to sustain losses than a larger company, and will therefore be much more wary of risky projects with downside risks that could bankrupt the company. Whilst preference theory has been widely applied to the industry in the literature, its value is questionable. There are difficulties in obtaining preference curves and in the construction of corporate preference curves. There is, however, some software available to automate the technique. For techniques 8-13, two points will be assigned where the technique is used routinely in organisations for investment appraisal and appropriate training is given to staff. One point will be allocated for partial implementation and zero points for non-usage. Qualitative and quantitative input. Chapter 6 showed that few, if any, decisions are based solely on quantitative analysis. It seems that decision-makers usually ultimately lack the faith to act purely on the basis of the quantitative output. In such cases qualitative influences, such as habit, instinct, intuition or imitation of others, are also used. Whichever, the reasons for disregarding quantitative analysis, or amending it, are to do with judgements of judgements, where the original judgements are inputs to quantitative analysis and the judgements of judgements pertain to strength of belief. Companies ought to have a systematic method for documenting and critically examining or calibrating their qualitative input. This would ensure transparent decision-making in alliances and partnerships. Much of the decision theory and industry literature fails to acknowledge the need for organisations to manage the qualitative and quantitative interface. There is no commercial software available that allows qualitative factors first, to be transparently included in the generation of the quantitative analysis, second, to be explored and modelled. Through recently established collaborative relationships, the major players (CSIRO, Merak, Gaffney-Cline & Associates, Wood Mackenzie and DNV) are now working together in an attempt to deliver to the upstream decision-maker such software. In the company ranking, organisations that manage the qualitative/quantitative interface explicitly perhaps by using soft methods (for example, through simple multi attribute rating techniques) will be assigned two points. One point will be allocated to organisations that acknowledge the existence of both quantitative and qualitative inputs to the decision-making process but do not try to manage their interaction overtly. No points will be given to companies that do not recognise nor manage the qualitative and quantitative input to the decision-making process. This list represents the collection of decision analysis tools and concepts presented in Chapters 5 and 6. The techniques and ideas do not represent alternatives but rather a collection of analysis tools and principles to be used together to encourage more informed decision-making. The organisation that utilises the full spectrum of these techniques and ideas is perceived to be adopting a transparent approach to decision-making that manages the full range of qualitative and quantitative aspects of the process.
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