Investment Decision Making in the Upstream Oil Industry: An Analysis

Abstract

Oil is the world‘s biggest and most pervasive business, the greatest of the great industries that arose in the last decades of the nineteenth century.These words of Daniel Yergin in his book, The Prize (1991), which chronicles the development of the world‘s oil industry, highlight the importance of oil industry in the recent times. In an environment of growing competition, higher resource costs, and significant price uncertainty, 'Investment Decision Making' is given top priority. There are many decision making techniques in academic literature. Some fundamental concepts were formulated more than two hundred years ago. But their application became apparent only in the 1950s and 1960s. Their application in practical decision making has been made recently. It is an acknowledged fact that the current practice techniques used for investment decision making in most industries lag behind the current decision theories.Which techniques are most appropriate and applicable to upstream oil industry is what is to be analyzed here. This study draws on the oil industry literature to find the techniques used by upstream oil companies. It tries to identify the techniques that are available and what are the tools appropriate for upstream investment decision making. Each tool has certain limitations. Thus, a combination of decision analysis techniques and concepts are to be used.The rationale behind this study is the assumption that the techniques used would be adding value to the upstream oil companies. This assumption would then be tested to verify this relationship. The risk and uncertainty involved in each technique is also considered.Investment appraisal, industry literature and the insights gained from various conferences, seminars etc. are used to draw conclusions.