Economics of Oil, Gas and Energy

Economics of Oil, Gas and Energy Week 5: Hand-In Assignment Hand-in Assignment This week you will be analysing a drilling decision using an interactive model. Open Interactive model, week 5.xlsm. There you will see a tree similar to Figure 5.5. At the top you will see the familiar white cells for changing inputs as well as the “Reset to Base Values” button. Further, near the very top you will see two links, labelled “Tree” and “S-curve.” You can click on these links to reveal either the tree or its corresponding S-curve. (Again, you may have to zoom in or out to see clearly.) Click to the tree. You will see expected value of $16 million you saw in connection to Figure 5.5, as well as the probability of discovery of 20%. Note that this shows a “truncated” version of the full tree. Now click to the S-curve. There you will see the S-curve associated with the tree. Below this you will see two measures of downside risk: the Worst Case of -$100 million, and an 80% probability of destroying shareholder value. Now click over to the Drill Decision-detail tab. Scroll around and you will see the full tree. Click back to the Drill Decision tab, and then click back to the tree and experiment with the inputs. You see that you can change the probability distributions on Recoverable Reserves and Future Oil Price. You can change the probability of discovery. You can change the size of the drilling investment. Also, you can change the initial production rate, which, you will remember from last week, changes the character of the production curve. Finally, you can change other inputs, but will not be required to do so for this week’s assignment. Try to find input combinations that switch the No Drill branch to red. Here are the questions for you to answer: Reset to base values and click to the tree. What probability of discovery would make the driller indifferent between drilling and not drilling? Reset to base values. What is the largest investment cost that the driller...