Economic Decision Analysis: For Project Feasibility Studies (SpringerBriefs in Petroleum Geoscience & Engineering)

Introduction
Contents
1 Project Feasibility
	1.1 The Big Bets of the Industry
	1.2 Valuation for Decision Making
		1.2.1 Finance Theory and Single Objective of a Firm
		1.2.2 Valuation in Practice
	1.3 The Decision Model
		1.3.1 Precise Decision Language
		1.3.2 Do Not Expect the Expected
	1.4 Analyses are Transitory (and Subjective)
		1.4.1 Soft versus Hard Analysis
		1.4.2 Decision Makers’ Bias in Valuations
	1.5 The Journey is Important
		1.5.1 Extinct by Instinct versus Analysis Paralysis
	1.6 Conclusions
	References
2 Understanding the Uncertainty
	2.1 Introduction
	2.2 Geological Uncertainty
		2.2.1 Division of Certainty
		2.2.2 Probability Tree Reversal
		2.2.3 Challenges in Eliciting Information
		2.2.4 Multiple Events
		2.2.5 Compound Events
	2.3 Uncertainty in Upstream Value Chain
		2.3.1 Errors of the Third Kind
		2.3.2 The Chance of Success
		2.3.3 Value of Appraisal
		2.3.4 Minimum Economic Volume
		2.3.5 Development Scheme: From Reservoir to Market
		2.3.6 Joint Development Solutions
		2.3.7 The Market Determines the Fate of the Projects
	2.4 “All Models Are Wrong, Some Are Useful”
		2.4.1 The Time Constraints
		2.4.2 Geologically Correlated Opportunities
	2.5 Conclusions
	Reference
3 Economics of Decisions
	3.1 Introduction
		3.1.1 Relative Valuations and the Law of One Price
		3.1.2 Black Swans in the Energy Industry
	3.2 Comparisons Across Time
		3.2.1 Valuing a Series of Cash Flows
	3.3 Comparisons Across Different Levels of Uncertainty
		3.3.1 Define Goals from the Point of View of Investors
		3.3.2 Market Data to Measure Risk and Return
		3.3.3 Beta and the Capital Asset Pricing Model
	3.4 Company’s WACC and the Project Discount Rate
		3.4.1 WACC for Company Valuation
		3.4.2 Project Discount Rate
		3.4.3 Influence Costs, Hurdle Rates, and Experience
	3.5 Making Valuation Models
		3.5.1 The Cash Flow Profile
		3.5.2 The Sunk Cost of an Exploration License
		3.5.3 Valuation and Behavioral Issues
		3.5.4 The Dilemma of Energy Projects
		3.5.5 Making Models: Granularity
		3.5.6 Making Models: Flaw of Averages
	3.6 Commodity Markets and Their Valuation Insights
		3.6.1 Uncertain Prices in Corporate Culture
		3.6.2 Price Forecasts
		3.6.3 Hedging Instruments
		3.6.4 Alternative to Project WACC: Certain-Equivalent Cash Flows
		3.6.5 Market vs. Technical Risk
	3.7 Conclusions
	References
4 Applications
	4.1 Introduction
		4.1.1 Non-linearity from Capacity Constraints
		4.1.2 Real Options (Value of Flexibility)
	4.2 Prices Dynamics
		4.2.1 Randomly Walking or Mean-Reverting Prices
		4.2.2 Dynamics of Price Forecasts
		4.2.3 Price Forecasts in Mean-Reverting Framework
		4.2.4 Parameter Estimation
	4.3 Real Options and Price Dynamics
		4.3.1 The Option to Wait
		4.3.2 Sequential Exploration and Uncertain Prices
	4.4 Environmental Considerations
		4.4.1 Emission Taxes and Project Feasibility
		4.4.2 Carbon Accounting and the Single Objective of a Firm
		4.4.3 Market Mechanism for Emission Control
	4.5 Conclusions: Useful Analyses and Common Pitfalls
	References