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This book discusses the art and science of economic decision making. It combines logical thinking with analytics, economics, and finance to draw decision insights for the upstream petroleum projects.
Energy projects are often costly, technically complex, and uncertain. In this book, we discuss a workable solution based on logical thinking and clear understanding. To improve our understanding, we further use concepts from economics, corporate finance, and decision analysis.
Chapter 1 discusses the fundamentals. Anyone working in industry either makes decisions or supports others who make decisions. For any project, all we do is making decisions. It could be a series of decisions or a major decision nesting all. Should we undertake a project or not? To recommend a course of action, we need consistent valuations. Therefore, all valuations are for making decisions. Value outside the context of decisions is meaningless.
Chapter 2 discusses the concepts in more details. We make decisions because we want to achieve our goals. Yet, we live in an uncertain world and the outcome of our decisions would be uncertain. We describe projects’ uncertainty using the language of probability. Our description makes the decision models. Still, they cannot (and should not) reflect all aspects of the real world. We should simplify. Our models should be simple enough (and realistic enough) to be useful. All models are approximations.
In Chapter 3, we discuss key approximations for economic decision models. Finance theory shows the relationship between uncertainty and value. It tells us what we should expect in return for taking economically risky opportunities. This understanding is key to a consistent comparison of our courses of action. We will discuss that project decisions should be for the benefit of their real owners, the investors.
Chapter 4 applies the key concepts from earlier chapters to real-world problems. Often these applications have subtleties that traditional models ignore. Therefore, we discuss how to reflect a further aspect of the real world in our decision models. The common theme in our discussions would be consistency of implementation and clear understanding. We use concepts of real options and dynamic decision making to enhance our models of project appraisal.
This book offers useful analysis skills for practitioners in industry, including analysts, engineers, and managers. In addition, advanced undergraduate and graduate students in petroleum engineering, applied petroleum geoscience, industrial engineering, and energy business would benefit from the discussions in this book