Economic Risk and Decision Analysis for Oil and Gas Industry: OTM Program, AIT

Offshore Technology and Management (OTM) Program

Economic Risk and Decision Analysis for Oil and Gas Industry Course Page

This webpage is intended to provide some additional and updated materials for

the economic risk and decision analysis for the oil and gas industry course at

the Asian Institute of Technology

Instructor : Thitisak Boonpramote

Ph.D. (Mineral Economics), Colorado School of Mines, USA.

Course Catalog

Reference Book:

Main text

1. M.A. Mian: Project Economics and Decision Analysis, Vol: 2, PennWell Corp., 2002.

2. P. Newendorp and J. Schuyer: Decision Analysis for Petroleum Exploration, 2nd. Edition, Planning Press, 2000.

Additional texts

3. R.T. Clemen and T. Reilly: Making Hard Decisions with DecisionTools, Duxbury. 2001.

4. I. Lerche and J.A. MacKay: Economic Risk in Hydrocarbon Exploration, Academic Press. 1993.

5. T. Copeland and V. Antikarov: Real Options: A Practitioner's Guide, Texere Publishing Ltd., 2001.

6. J. Mun: Real Options Analysis: Tools and Techniques for Valuing Strategic Investments and Decisions, John Wiley&Sons Inc., 2002.

7. A.K. Dixit and R.S. Pindyck: Investment under Uncertainty, Princeton University Press, 1994.

Powerpoint presentation in PDF file: (click the name to download presentation)

Class every Thrusday: 15:00-18:00

Week 1: Jan 14, 2010
- Introduction to the upstream oil and gas business decision analysis
- Review of descriptive statistics
Week 2: Jan 21, 2010
Week 3: Jan 28, 2010
- Probability Distributions
- Expected value concepts
Week 4: **Feb 04, 2010 canceled: make-up class on Feb 11, 12:00-15:00
- Decision Tree analysis
- Assignment #1: Texaco-Penzoil case using DTA
Week 5: Feb 11, 2010
- Baysian Analysis for revised probability
Week 6: Feb 18, 2010
- Decision analysis recognizing a "value of information situation" with assignment #2: Lunar oil company
- Assignment #3: Oil spill risk analysis for VLCC
Week 7: Feb 25, 2010
- Download page for Decision Tools program (Precision Tree, @Risk, etc.)
- Monte Carlo Simulation (MCS) concepts and methodology
- Monte Carlo Simulation using @RISK
- Assignment #4: From Risk Analysis for the Oil industry:
  - Monte Carlo Simulation vs Decision Tree (pp. 14-19) : Two case studies
  - When does correlation matter? (pp. 20-23)

*******Midterm Exam: March 4, 2010********************************

Week 9: Mar 11, 2010
Week 10: Mar 18, 2010
- Assignment #5: Texaco-Penzoil revisit using expected utility (Hard copy)
- Assignment #6: South Texas Energy Corporation case using expected utility
Week 11: Mar 25, 2010
- Utility Functional Forms and Risk Tolerance
Week 12: Apr 01, 2010
- Project Portfolio concepts
- Introduction to Real Options
- Option concepts and option pricing
Week 13: Apr 08, 2010
- Value from Real Options
- Option Pricing Theory (OPT) and applications to real options
- Assignment #7: Valuation of Onshore Mature Oil Fields: The New Bidding Rounds in Brazil using the Real Options approach
**********No class on Apr 15, 2010 Happy Songklan Festival***********
Week 14: Apr 22, 2010
- Real Option Valuation (ROV) model
- Stochastic Process

*******Final Exam: Apr 29, 2010************************************

Additional Reading Assignment in PDF file:

Making decisions in the oil and gas industry, Coopersmith, E. et. al., Oilfield Review 2000.
Risk Analysis applied to petroleum exploration and production: an overview, Suslick, S.B. and D.J.Schiozer, Journal of Petroleum Science and Engineering, 2004.
Risk Analysis for the Oil industry: A supplement to Hart's E&P by Decisioneering:
- A guide to risk analysis (pp. 1-4)
- Central limit theorem - polls and holes (pp. 5-8)
- Estimating pay thickness from seismic data (pp. 9-11)
- Bayes' theorem pitfalls (pp. 12-13)
- Monte Carlo Simulation vs. Decision Tree (pp. 14-19)
- When does correlation matter? (pp. 20-23)
Probability concepts in petroleum exploration
- Influence of different probability based models on oil prospect exploration decision making: a case from southern Mexico, Salleh, S.H. et. al., Revista Mexicana de Ciencias Geologicas, 2007.
Risk Tolerance concepts
- Taking a calculated risk, Bailey, W. et.al.Oilfield Review 2000.
- An Appraisal of Corporate Risk Tolerance in the Oil Exploration and Production, Pinto A. et al., AAPG International Conference, 2003.
- Measuring and Utilizing Corporate Risk Tolerance to Improve Investment Decision Making, Michael R. Walls, Colorado School of Mines, 2005.
Real Option Valuation concepts
- Unlocking the value of real options, Bailey, W. et.al.Oilfield Review 2003/2004.
- An option pricing approach to evaluating petroleum projects, Ekern, S., Energy Economics, 1988.
- Comparing three methods for evaluating oil projects: option pricing, decision trees, and Monte Carlo simulations, Galli, A. et. al., SPE 52949, 1999.
- Incorporating technical uncertainty in real option valuation of oil projects, Armstrong, M. et. al., Journal of Petroleum Science and Engineering, 2004.

Interesting Links

Real Option Approach in Valuing Resource Investments and Managerial Flexibility

Society of Petroleum Evaluation Engineers (SPEE)