Last Updated 06 Sep 2020

Oil Company Must Decide Whether or Not to Drill

Category Company
Words 335 (1 page)
14 views

An oil company must decide whether or not to drill an oil well in a particular area that they already own. The decision maker (DM) believes that the area could be dry , reasonably good or a bonanza. See data in the table which shows the gross revenues for the oil well that is found. Decision Dry (D) Reasonably Bonanza(B) good(G) Drill $0 $85 $200 m Abandon $0 $0 $0 Probability 0. 3 0. 3 0. 4 Drilling costs 40M. The company can take a series of seismic soundings ( at a cost of 12M) to determine the underlying geological structure.

The results will be either “no structure”, “open structure or “closed structure”. The reliability of the testing company is as follows that is, this reflects their historical performance. Note that if the test result is “no structure” the company can sell the land to a developer for 50 m, otherwise (for the other results) it can abandon the drilling idea at no benefit to itself. . Conditional Probability for a given state of nature Seismic Results Dry(d) Reasonably good(g) Bonanza(b)

No structure(N) 0. 7 0. 3 0. 1 Open(O) 0. 2 0. 3 0. 4 Closed (C ) 0. 10. 4 0. 5 That is P (N/D) =0. 7; P (O/G) =0. 3, P(C/B) =0. 5 After you have computed the revised probabilities round to two decimal places

Order custom essay Oil Company Must Decide Whether or Not to Drill with free plagiarism report

GET ORIGINAL PAPER

Construct the appropriate decision tree to help the oil company make the appropriate decisions. This tree must be constructed in logical order with labels and net payoffs. It also includes the revised probabilities  Fold back the decision tree) to determine the best strategy for the company; you must state this strategy . What is the final expected profit?

  1. What is the expected value of sample information(EVSI)- the most that should be paid to seismic testing firm for the test?
  2. Calculate the expected value of perfect information (EVPI)- the most that should be paid to an expert for perfect prediction of the uncertain outcomes
  3. What is the efficiency of sample information
Oil Company Must Decide Whether or Not to Drill essay

This essay was written by a fellow student. You can use it as an example when writing your own essay or use it as a source, but you need cite it.

Get professional help and free up your time for more important courses

Starting from 3 hours delivery 450+ experts on 30 subjects
get essay help 124  experts online

Did you know that we have over 70,000 essays on 3,000 topics in our database?

Cite this page

Explore how the human body functions as one unit in harmony in order to life

Oil Company Must Decide Whether or Not to Drill. (2017, Jan 20). Retrieved from https://phdessay.com/oil-company-must-decide-whether-or-not-to-drill/

We use cookies to give you the best experience possible. By continuing we’ll assume you’re on board with our cookie policy

Save time and let our verified experts help you.

Hire writer