Economic Decision Models For Management
Authors: Lazier Bruce E. 
Published: December 2007

This paper was prepared for the 40th Annual California Regional Meeting of the Society of Petroleum Engineers of AIME, to be held in San Francisco Nov. 6–7, 1969. Permission to copy is restricted to an abstract of not more than 300 words. Illustrations may not be copied. The abstract should contain conspicuous acknowledgment of where and by whom the paper is presented. Publication elsewhere after publication in the JOURNAL OF PETROLEUM TECHNOLOGY or the SOCIETY OF PETROLEUM ENGINEERS JOURNAL is usually granted upon request to the Editor of the appropriate journal provided agreement to give proper credit is made.

Discussion of this paper is invited. Three copies of any discussion should be sent to the Society of Petroleum Engineers Office. Such discussion may be presented at the above meeting and, with the paper, may be considered for publication in one of the two SPE magazines.

The purpose of most petroleum engineering work is to prepare input data for economic decision models. These models provide information to management concerning the relative benefits and costs of alternative management decisions. Although simple economic decision models have always been used (at least intuitively), managers now face increasingly complex decisions. Management science can provide powerful tools to help analyze these provide powerful tools to help analyze these complex decisions. A classification system is presented, and examples of management science presented, and examples of management science models used in oilfield development gas reservoirs and plant investment, oilfield or operations, equipment policies and exploration are given.

Introduction

Although management has always used economic decision models, these models have been mostly intuitive. Two factors are combining to cause an increase in the use of formal economic decision models. One factor is the increasing "profit squeeze" resulting from rising costs, relatively constant product prices, more competition and increasing prices, more competition and increasing nationalism. This increases the need for not just making a "good" decision but the "best" decision. This is a particularly true for capital resource allocation.

Fortunately, the other factor is the increasing ability of "management scientists" to provide management economic decision models. These tools provide information about the relative costs and benefits of alternative management actions—-the "what if" questions. The purpose of a model is to predict—in this case economic effects.

These "management sciences" or "operations research" models are somewhat analogous to reservoir engineering models except that the "what if" questions are primarily economic and secondarily physical. But these economic models depend on physical predictions prepared by petroleum engineers and others.

In this paper I present a classification for economic decision models. I have tried to penetrate the "jargon curtain" by listing the penetrate the "jargon curtain" by listing the management science, petroleum engineering and management words side by side for each item.

Lastly I give several examples of economic decision models developed for Mobil's exploration and producing managers. These are given solely to illustrate the classifications and definitions presented.