Game theory oil exploration

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Correspondence to Alexandre Bevilacqua Leoneti. Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Game theory takes a dim view of human nature. Each of the countries looks out for itself, and no matter what the other country decides—to stick to the deal or break it—the best option is to break the deal. This produces the dilemma. If both countries stick to the deal they would make apparently reasonable revenue of USD 1, and be better off than if both break the deal.

Game theory applications in the oil and gas industry tend to fit one of three broad classes. First is competitive bidding, where companies are competing for limited opportunities. Second is the joint venture partnership, where several companies must cooperate to bring a project or other opportunity to fruition. Third is the negotiation among partners, customers and suppliers, and governments, where each party is trying to obtain the largest possible share.

Game theory can provide insights on each of the classes. Competitive Bidding. Bidding in auctions are classic game theory problems. In the oil and gas industry, most major new opportunities are made available by host countries through a sealed bid process. The simplest form may be bonus bidding, such as in the U. Far more complex is work commitment bidding, where companies bid to perform a set amount of work in return for an opportunity to participate in the development and production of new reserves.

In general, game theory cannot calculate what an opportunity is worth to a company, which is the role of conventional decision analysis and valuation techniques. However, once a company understands the value it sees in an opportunity, game theory will help the company understand how to capture that opportunity without sacrificing the very value it wishes to capture. The analysis will shed light on how the seller usually a national government views the payoff, based on its objectives, what tradeoffs may be attractive, and the amounts that other players may be willing to offer.

In some cases, game theory can provide insights that result in a winning bid; in others, game theory can provide the clarity to convince a company not to bid. Both insights can be equally valuable, as not all games are worth winning. Joint Ventures. Most major projects and opportunities in the oil and gas industry are structured as joint ventures between competitors. A typical partnership could consist of several major international energy companies, national oil companies, the government, and other investors.

Partnerships of four or five entities are not unusual. The partners in these joint ventures often have conflicting objectives, values, and priorities. However, for a project to be successful, the partners must find common ground on which to agree and proceed with the effort. This creates an ideal setting for the application of game theory methods to analyze the project decisions and find solutions that allow a company to create value for itself while other partners also see incentive to proceed.

Game theory can help a company understand its position, its degree of power, and the leverage points it can use to achieve the best outcome. Game theory allows the analyst to look at the negotiation from all sides and discover key tradeoffs and acceptable terms.

Negotiators armed with a thorough game theory analysis have a significant advantage in understanding their best alternative. This discussion focused briefly on three broad classes of game theory applications.

However, each game theory analysis must focus on the specific objectives and preferences of the players involved.

Much of the literature on game theory focuses on basic two-player games, where players have mutually exclusive options such as play A or B or some mixed strategy playing each a fraction of the time. The real games we face in the oil and gas industry often involve four to six players, each having multiple options that are not mutually exclusive. This greatly complicates the game, although the fundamentals may not change.

The challenge in applying game theory in oil and gas problems is to maintain the critical elements of the game while simplifying it so that it can be analyzed. Bratvold, R. Willigers, B. SPE PA. Games, Strategies, and Decision Making. Worth Publishers. Reidar B. Bratvold is a professor of petroleum investment and decision analysis at the University of Stavanger and at the Norwegian University of Science and Technology, Trondheim. His research interests include decision analysis, representing and solving decision problems in the upstream oil and gas industry, valuation of risky projects, portfolio analysis, and behavioral challenges in decision making.

Before entering academia, he spent 15 years in the industry in various technical and management roles. He was made a member of the Norwegian Academy of Technological Sciences for his work in petroleum investment and decision analysis.

He is the decision analysis practice leader and is responsible for promoting and improving the application of decision sciences in support of decision-making practices across the company. Koch has an extensive background in management coaching and training and works with management teams and other Chevron decision makers to help them evaluate complex decisions.

He also teaches several decision analysis classes at Chevron.