The international oil and gas industry is one of the most important, highly capital-intensive andrisky
industries at global, regional, and local levels. Therefore, it is very crucial to carry out prudent
economic evaluations of any capital investment’s commitment before resources are committed. This
requires a through understanding of the techniques available and their application by all those
involved indecision-making. The main objective of the course is to introduce students to the science
of decision making and risk theory. Focus on the application of decision analysis, utility theory and
real option valuations to the analysis of strategic decision problems characterized by risk, uncertainty
and management flexibility.

Oil and gas project evaluations under risk and uncertainty; decision analysis; real options valuation.

None

Module I: The probabilistic model of the oil and gas exploration projects
1. Descriptive Statistics: Measures of central tendency and variability (mean, median,
mode),measures of variability (range, variance, standard deviation, covariance,
correlation coefficient)
2. Probability concepts: Objective probability, subjective probability, event sets,
operations onevent sets, rules of probability , Baye’s rule
3. Theoretical probability distributions: discrete and continuous distributions
4. Expected value concepts and decision tree analysis in the oil and gas industry using
Precision Tree application
5. Bayesian analysis and value of information
Module II: Simulation in decision analysis and attitudes toward risk
1. Designing simulation model and spreadsheet applications using Excel and @RISK
2. The expected utility theory and expected utility decision criteria
3. Assessing the utility function
4. Risk preferences, certainty equivalent, risk premium, and risk tolerance
5. Determining venture participation
Module III: Valuing Project Flexibility: Real option valuation concept
1. Financial options and option pricing models
2. Real option concepts and managerial flexibility
Real options model: option to defer investment, option to expand, option to abandon

None

1. M.A. Mian: Project Economics and Decision Analysis, Vol: 2, 2nd.Edition, PennWell Corp.,
2011.
2. R.B. Bratvold and S.H.Begg: Making Good Decisions, Society of Petroleum Engineers, 2010.
3. Lecture notes and selected papers

1 P. Newendorp and J. Schuyer: Decision Analysis for Petroleum Exploration, 2nd. Edition, Planning Press, 2000.
2. Lerche and J.A. MacKay: Economic Risk in Hydrocarbon Exploration, Academic Press.1993.
3. J. Mun: Real Options Analysis: Tools and Techniques for Valuing Strategic Investments andDecisions, John Wiley&Sons Inc. 2002.

1. Operation Research
2. Financial Management

The final grade will be computed according to the following weight distribution: mid-semexam (30%)
final exam (30%), assignments/projects (40%). Closed book examinations are usually givenboth in
the mid-semester and finals.