Systems Approach Vs. Decision-Tree Analysis: An Offshore Development Decision

Abstract

A good investment decision-making process is one that is able to assess risk and uncertainty and is able to manage these in a balanced manner. A common practice in the oil and gas industry is to use a decision-tree analysis as a way to incorporate risk and uncertainty in investment decisions. In this article, we introduce an alternative called the system's approach based on a stochastic integrated asset model. The objective is to use the tried and tested decision-tree approach to show the validity of the system's approach and to show that with the incorporation of an infinite number of outcomes, decision-tree analysis results would approximate the results of the system's approach and then demonstrate the superiority of the system's approach. For a hypothetical but realistic example, we demonstrate that the decision-tree results differ by 5% for the mean and 20% for the standard deviation when compared to the system's approach. The decision-tree approach tends to underestimate the low side and overestimate the high side. This difference is due to the fact that the system's approach captures complexity, uncertainty, dependency, and interaction more accurately than the decision tree approach.