STAT 2112 assignment
Assignment 1 STAT 2112 Canadian Arctic Petroleum (CAP) is a company with a focused strategy on the exploration for, and sustainable development and production of oil and natural gas in the polar regions. The company uses the advanced technological methods including most ecologically safe techniques of offshore drilling and underwater pipeline support. Currently the management of the company is considering two gigantic and potentially promising projects. CAP is ready to invest 500 million dollars, but first the company has to make a decision and choose one of the two. 1. The Nanuq Nunangat (The Land of Polar Bears in Inuit language) is a large natural gas field located in the Arctic Ocean off the cost of Ellesmere Island. This is one of the world’s largest gas finds of the last decades. There is a problem, however. Though CAP intends to set up platforms and drill within the Canadian exclusive economic zone, most likely the gas field stretches far beyond it. This can cause some diplomatic complications as Russia and Denmark had made claims to the North Pole and large portions of Arctic seabed, and recently Canada made a counterclaim. The federal government in Ottawa is ready to sanction a detailed exploration of the field, but starting the full scale development and production means to declare an outright diplomatic war. So, if CAP chooses this project (the Polar Bear project is its unofficial name), then they would conduct a full field reconnaissance and estimation investing $50 million in it and prepare all paperwork. Only then the government will decide to give the go-ahead or not. The company realistically estimates that the chance of the federal government consent is about 80%; and still there is a 20% chance that the project will be frozen. If CAP receives the permission, then they would invest the remaining $450 million. At this stage they would have to make one more important decision regarding the technological side of the matter. They can choose one of three options: 2 develop a new method for natural gas extraction specifically for Arctic conditions including construction of a deepwater drilling rig for drilling in ice; keep using the existing method with the focus on conventional permanent and floating platforms; subcontract the most technically challenging part of the processing to the British, US, or Norwegian petroleum companies with the extensive relevant experience. If company uses the existing method, then the detailed forecast looks like this: Outcomes Probability Profit/Loss ($ millions) Great success 0.55 3000 Moderate success 0.25 1800 Some success 0.15 800 No success 0.05 ─ 100 As for the new method, the situation is less predictable. The company is carefully considering just two outcomes, success and failure, though both with huge monetary values. Outcomes Probability Profit/Loss ($ millions) Success 0.85 3500 Failure 0.15 ─ 1700 The subcontract will give a guaranteed profit of $1900 million. Profits/losses listed above for the three options do not incorporate the investment of $500 million. 2. The Goliath oil field is located about 200 km off the coast of Labrador. The field is extremely rich and the oil is easily recoverable, so the Goliath project is potentially very profitable. The problem is that in the rapidly changing climate the Newfound and Labrador area is becoming a place of the very unstable weather. A sea storm that occurred right above the Goliath oil field in November 2018 was described as “the most intense storm on the planet” with winds gusting to 150 km/h that caused huge waves 15-18 m high. CAP realized that if they invest money and start working on the project and a similar megastorm occurs within two years from the start of the project, the consequences will be catastrophic with huge monetary losses, enormous ecologic damage and corresponding huge fines, and probably loss of human lives. They need at least two years to finish installing all engineering safety equipment so that the site could survive such storm without being completely destroyed. At this point the CAP’s estimates are as follows. Outcomes Probability Profit/Loss ($ millions) Megastorm in 2020-2021 0.075 ─ 7000 No megastorm in 2020-2021 0.925 3000 Profits/losses listed above do not incorporate the investment of $500 million. 3 3. If the company chooses none of the projects, neither Polar Bear project, nor Goliath project, it will invest in the existing oil and natural gas fields with a guaranteed profit of $1100 million. This amount incorporates the amount of investment. Canadian Arctic Petroleum is considering hiring Toronto Meteorological Research Company (TMRC) to estimate the real chances of a gigantic sea storm in the Goliath project area. TMRC experts will provide a favourable report (go ahead, there will be no megastorm) or unfavourable report (a megastorm is expected within two years). It is known that there is 90% chance that TMRC provides favourable report given positive outcome. There is also 80% chance that TMRC provides unfavourable repot given negative outcome. TMRC specialists need three months to complete their analysis and request $20 million as they have to use expensive equipment and hire additional staff. CAP would like to get a report from TMRC before they make a decision. Please perform an analysis of the problem facing the Canadian Arctic Petroleum, and prepare a report that summarizes your findings and recommendations. Include the following items in your report: 1. A (simple) decision tree that shows the logical sequence of the decision problem given the TMRC research information is not available. 2. A recommendation regarding what Canadian Arctic Petroleum should do if the TMRC information is not available. 3. A decision strategy that Canadian Arctic Petroleum should follow if the TMRC research is conducted based on the posterior probabilities and a revised decision tree. 4. A recommendation as to whether Canadian Arctic Petroleum should employ TMRC, along with the detailed decision policy, the value of the information provided by the research firm and the efficiency of this information. Use Excel TreePlan to construct both decision trees. Include the details of your analysis as well as the TreePlan output as an appendix to your report.