Decision analysis of exploration opportunities in the Onshore US at Phillips Petroleum Company

Petroleum exploration managers must allocate scarce resources across a set of risky and uncertain investment alternatives. The authors developed a decision analysis software package, DISCOVERY, that provided an exploration division of Phillips Petroleum Company an alternative means of evaluating a mix of risky investments and selecting participation levels consistent with the firm’s risk propensity. Managers at Phillips use the software to (1) evaluate projects with a consistent risk-taking policy, (2) rank projects with a consistent risk-taking policy, (2) rank projects in terms of overall preference, (3) identify the firm’s appropriate level of participation, and (4) stay within their division budgets. This approach increased management’s awareness of risk and risk tolerance and provided insight into the relative financial risks associated with its available investment opportunities. As a result of this project, the company has developed consistent methods of risk analysis that include companywide analysis of all exploration projects.