Economic Decision-Making Practices in the U.S. Petroleum Industry

Abstract

American Institute of Mining, Metallurgical, and Petroleum Engineers, Inc. Discussion of this paper is invited. Three copies of any discussion should be sent to the Society of Petroleum Engineers office. Such discussion may be presented at the above meeting and, with the paper, may be considered for publication in one of the two SPE magazines. Abstract This paper explores several aspects of economic decision making in actual use by members of the petroleum industry, including cost of capital, measures of investment evaluation, required minimum rate of return, and risk-analysis methodology. Certain internal procedures utilized by the responding firms in procedures utilized by the responding firms in the application of the above mentioned measures are reported and compared. The contents of this paper have valid implications for a variety of audiences. This study illustrates how different petroleum executives are handling economic decision making and evaluates the state-of-the-art of the economic decision-making process in the petroleum industry. The results of this study petroleum industry. The results of this study can be used by firms to evaluate and possibly improve their own practices. This paper can make its greatest contribution to smaller firms in the industry who have not yet adequately developed their economic-analysis capabilities and, hence, are searching for procedures to improve their economic decision making. This paper is based on the responses to a four-page questionnaire that was mailed to the chief executive officers of 15 major companies in the petroleum industry; 12 companies responded. Introduction The opportunities for investment or capital outlays form the framework for a company's future development and are a major determinant of efficiency and competitive power. Consequently, a corporation's investment decisions have a profound effect upon its future earnings. profound effect upon its future earnings. Any business is continuously faced with the problem of making investment decisions. Even problem of making investment decisions. Even for the small business, the problem of reinvestment of earnings, expansion, or diversification is a continuing one. Investment opportunities usually are analyzed by various segments of the organization, but the final decision is the responsibility of top management. This situation points out the need for sound programs of evaluation. Management needs an objective means of measuring and comparing the economic worth of the individual investment proposals submitted by various divisions of the organization in order to have a realistic basis for choosing among them and selecting those that will make the greatest contribution to meeting corporate goals. In addition, using objective criteria and formal guidelines for processing of capital investment proposals allow some investment decisions to be proposals allow some investment decisions to be delegated to lower levels of management, economizing on top-management time.