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STAT 2112

Assignment 1

Athabasca Oil and Gas Corporation is a Canadian energy company with a focused strategy on

the development of thermal and light oil assets. Situated in Alberta’s Western Canadian

Sedimentary Basin, the company has amassed a significant land base of extensive, high quality

resources and is primarily concentrated on the exploration for, and sustainable development of,

bitumen from oil sands in the Athabasca region, and light oil and liquids-rich natural gas from

regions in northwestern Alberta.

Athabasca Oil and Gas Corporation is currently considering making a bid for a new oil

development contract to be awarded by the federal government. However, this site is located in

the southeastern part of Alberta and might require a new method of oil extraction as the

conventional method would hardly be very efficient. Athabasca Oil and Gas Corporation decided

to bid $200 million. The company realistically estimates that it has a 75% chance of winning the

contract with this bid. If Athabasca Oil and Gas Corporation wins the contract, it can choose one

of three options: develop a technologically new method for oil extraction, keep using the

existing method, or subcontract the processing to a number of smaller US and Canadian

companies.

If company uses the existing method, then the detailed forecast looks like this:

Outcomes Probability Profit/Loss ($ millions)

Great success 0.30 300

Moderate success 0.45 200

Some success 0.15 50

No success 0.10 ─ 75

As for the new method, the situation is less predictable. The company is carefully considering

just two outcomes, success and failure, though both with huge monetary values.

Outcomes Probability Profit/Loss ($ millions)

Success 0.30 700

Failure 0.70 ─ 250

The subcontract will give a guaranteed profit of $250 million.

Profits/losses listed above for the three options do not incorporate the supposed bid price of $200

million.

The cost of preparing the contract proposal is $3 million. If the company does not make a bid, it

will invest in an alternative venture with a guaranteed profit of $50 million.

Athabasca Oil and Gas Corporation is considering hiring Calgary Geological Research Company

(CGRC) to estimate their chances with the new oil extraction method. CGRC experts will

provide a favourable report (go ahead with the new method) or unfavourable report (application

of the new method will hardly be successful). It is known that there is 90% chance that CGRC

provides favourable report given positive outcome. There is also 80% chance that CGRC

provides unfavourable repot given negative outcome. CGRC specialists need six months to

complete their analysis and request $5 million as they have to use expensive equipment and hire

additional staff.

Please perform an analysis of the problem facing the Athabasca Oil and Gas Corporation, and

prepare a report that summarizes your findings and recommendations. Include the following

items in your report:

1. A (simple) decision tree that shows the logical sequence of the decision problem given

the CGRC research information is not available.

2. A recommendation regarding what Athabasca Oil and Gas Corporation should do if the

CGRC information is not available.

3. A decision strategy that Athabasca Oil and Gas Corporation should follow if the research

is conducted based on the posterior probabilities and a revised decision tree.

4. A recommendation as to whether Athabasca Oil and Gas Corporation should employ

CGRC, along with the value of the information provided by the research firm and the

efficiency of this information.

Use Excel TreePlan to construct both decision trees. Include the details of your analysis as

well as the TreePlan output as an appendix to your report.