8 Pages Posted: 7 Nov 2017 Last revised: 18 Dec 2017
Wilford Marshall is preparing recommendations to Petrosupra Exploration (Petrosupra), an independent oil and gas company, regarding a drilling project in Lafourche Parish, Louisiana, on the Gulf Coast. This was an opportunity to take over Coyote Oil's drilling rights and drill within a year. If oil was found, two years following that, Petrosupra would have the additional opportunity to initiate enhanced recovery, which could provide an additional stream of oil. To evaluate the contract, Marshall will consider the path that oil prices will take and the amount of oil discovered. Enhanced recovery is a real option for which Marshall must think about a decision rule for the downstream decision and the optimal trigger point for such a rule. All the uncertainties and this option will be simulated to determine the value of (a) the rights to the well and (b) the value of the enhanced recovery option. Claiborne Chemical (CC) affords the opportunity to reduce the exposure to quantity and price uncertainty that is generated by the well. The beauty of swapping an interest in Petrosupra's well for an interest in the CC opportunity is that it exchanges an exposure to oil price for an opposite exposure to the price of a fuel additive that is negatively correlated to oil price. With some analysis of the risks and the best exchange shares, the project risk can be reduced dramatically.
Rev. Oct. 25, 2017
Wilford Marshall ate his sandwich and pored over the proposed drilling program for the upcoming year. Marshall had taken a job with Petrosupra Exploration (Petrosupra) eight months earlier, after working for almost 10 years as a reservoir engineer for Dome Oil (Dome), one of the largest exploration and production companies in the world. While Marshall had enjoyed his work at Dome, he eventually developed an itch to work in a nimbler small company that would more quickly adopt new evaluative techniques. Marshall was looking forward to using decision and risk analysis to improve the drilling-program results at Petrosupra. He also expected to be able to implement some hedging strategies to reduce risk related to the development of new wells. With the beginning of the year now upon him, Marshall was eager to get to work. The first drilling prospect to be analyzed was in Lafourche Parish, Louisiana.
While at Dome, Marshall had worked as part of a team of reservoir engineers to evaluate drilling prospects and to design the company's annual drilling program. At Dome, the team of reservoir engineers would meet monthly to evaluate potential drilling sites. Typically, the team would analyze reserve data and tests for a particular site, review production profiles from nearby drill sites, “gut-check” the potential site's value using current commodity prices, and then make a decision.
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Keywords: quantitative analysis
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