Subject : Prescriptive Analytics

Software : Analytics Solver

Question

Southern Gas Company (SGC) is preparing to bid for oil and gas leasing in a newly opened drilling area in the Gulf of Mexico. SGC is trying to decide whether to place a high bid of $21 million or a low bid of $12 million. SGC expects to be bidding against its major competitor, Northern Gas Company (NGC), and predicts that NGC to place a bid of $14 million with a probability of 0.45 or a bid of $9 million with a probability of 0.55. Geological data collected at the drilling site indicates that the reserve is large with a 20% chance, average with a 35% chance, and unusable with a 45% chance. A large and average reserve represents an asset value of $145 million or $35 million, respectively. The company that wins the bid will drill an exploration well at the site at a cost of $7 million.

a.Develop a decision tree for this problem.

b.What is the optimal decision according to the EMV criterion?

c.Create a tornado chart and interpret the output.

d.All else being constant, how would the optimal decision change if the probability of the NGC bidding $14 million varies between 0% to 100%?

e.Create a strategy table showing how the optimal decision would change if the net asset value of a large reserve varies from $120 million to $160 million in $5 million increments and the net asset value of an average reserve varies from $28 million to $42 million in increments of $2 million.