A Game Theoretic Approach to Conflicting and Evolving Stakeholder Preferences in the E&P Industry

Abstract

Summary In the high-risk E&P industry, the profit of each stakeholder depends on the strategies of all. The optimal choice for one player may not be optimal for other players, who may opt to prevent it. These characteristics suggest using game theory to model decision situations in the E&P industry. In a business dominated by joint ventures and tight governmental regulation, an understanding of the interests and influence of all stakeholders is particularly important. Although the E&P industry is accustomed to developing complex economic models to obtain insight into the commercial attractiveness of joint ventures, the influence of other stakeholders is often ignored. Each stakeholder must decide how much to invest, in which sequence to make decisions, whether to make decisions before or after the other stakeholders, which decisions to make before vs. after technological and organizational uncertainty is resolved, whether to accept or block the designation of one stakeholder as dominant, and whether to accept or block hub placement within one of multiple oil fields. A joint development program of a portfolio of gas fields and its gas processing and export facility has been analyzed using tools from game theory. The focus is on which infrastructure to develop and when. Players' preferences are functions of equity stakes and expected reserve sizes of the prospects. The analysis provides insight into the preferred development options of the individual players, how preferences change as uncertainty gets resolved, and how much individual players are to gain or lose if certain investment decisions are made. The analysis allows a player (1) to identify under what conditions its objectives are aligned with fellow players, and (2) to quantify the maximum amount it can pay to gain support from its fellow players.