game theory focus group

E&P Games

Bart J.A. Willigers, Palantir Economic Solutions Ltd.

Reidar Bratvold & Kjell Hausken, University of Stavanger, Norway

Agenda• Introduction Game theory

• Three games

– Oil price setting

– Investing in one field or the next

– Choosing a regional hub

• Decision analysis and game theory

• Conclusions


“Slave”

“Master”

Game theory

• Players in a relationship have different objectives and influencing powers

• The optimal choice for any individual player might not be optimal for its fellow

players

• The preferred outcomes might not be achievable because of the power of other

participants


How many SPE papers have been written on game theory?

a) more then 1,000

b) between 500 and 1,000

c) between 100 and 500

d) between 50 and 100

e) less than 50


• Some SPE statistics…..

– Total papers: 50,000

– Risk papers: 6,338

– Real option valuation papers: 803

• Game theory

– Two Nobel prizes

– 27,000 Amazon hits

• How many SPE game theory papers?

a) more then 1,000

b) between 500 and 1,000

c) between 100 and 500

d) between 50 and 100

e) less than 50


One paper has been written….

• W. C. Kimbrell (2008)The Consideration and Applicability of Game Theory to

Reserve Valuation. SPE 115541

• 0.002% of the SPE library focuses on Game theory!



• Three games





• Conclusions

Game 1: Oil price setting

• OPEC countries aim to maximise their oil revenues by

setting production targets


Example 1: Oil price setting

• A country can either produce 10 or 20 bll

• Increased production will lower oil price


0

20

40

60

80

100

120

140

160

15 20 25 30 35 40 45

Oil

pric

e

Oil produced

Large producing country B

Low production High production

Large producing country A

Low production

High production





Low production

140$*10bll

140$*10bll

High production





Low production

140$*10bll 75$*20bll

140$*10bll 75$*10bll

High production

75$*10bll 40$*20bll

75$*20bll 40$*20bll





Low production

1400$ 1500$

1400$ 750$

High production

750$ 800$

1500$ 800$





Low production 1400$

High production 1500$





Low production 1400$ 750$

High production 1500$ 800$





Low production

1400$ 1500$

High production





Low production

1400$ 1500$

High production

750$ 800$





Low production

1400$ 1500$

1400$ 750$

High production

750$ 800$

1500$ 800$


Small producing country C



Low production

140$*1bll 140$*2bll

140$*20bll 140$*20bll

High production

40$*1bll 40$*2bll

40$*40bll 40$*40bll





Low production

140$ 280$

2800$ 2800$

High production

40$ 80$

1600$ 1600$


The real-life game

• High oil price rises in the 1970s caused a global recession. This reduced oil

consumption for a long period

• Small Producers like Algeria, Nigeria and Libya frequently cheat and exploit the

high prices. Saudi Arabia has a strong incentive not to cheat in order to keep

prices high


• Nash equilibrium: none of the players can profit from changing strategy

• Cournot game: Market equilibrium



• Three games





• Conclusions

Game 2: Investing in a hub or satellite field

• Two E&P players

– have an equity stake in two hydrocarbon fields

– are considering investment in one of the fields

• One field is also a regional hub



Invest in hub

Hub SatelliteTotal for player

Total for project

Player A 334Player B 3,002

Invest in satellite


Total for project

Player A 258Player B 2,323


Invest in hub


Total for project

Player A 334 1,196Player B 3,002 133

Invest in satellite


Total for project

Player A 258 1,341Player B 2,323 149


Invest in hub


Total for project

Player A 334 1,196 1,530 4,664

Player B 3,002 133 3,134

Invest in satellite


Total for project

Player A 258 1,341 1,599 4,072

Player B 2,323 149 2,472


Invest in hub


Total for project

Player A 4,664

Player B

Invest in satellite


Total for project

Player A 4,072

Player B


Invest in hub


Total for project

Player A 4,664

Player B 3,134

Invest in satellite


Total for project

Player A 4,072

Player B 2,472


Invest in hub


Total for project

Player A 1,530 4,664

Player B

Invest in satellite


Total for project

Player A 1,599 4,072

Player B

Game findings

• The preference of a player does not necessarily lead to an optimal overall

project outcome

• Real life additional complexities:

– Investment in host might delay it’s COP

– Information asymmetry



• Three games





• Conclusions

Game 3: Where to build a regional processing facility

• Three E&P players

– equity stakes in three hydrocarbon fields

– when and what regional hub to build

• The reserves of the fields are uncertain

• The facility capex and opex varies for each option



Which field?

Size 1st

discovery Build hub? Which hub?

Production Cost

Value

Which field? Build hub? Which

hub?Size 2nd

discovery

Build hub?Size 3th

discoveryWhich hub?

First drilling campaign

Second drilling campaign

Third drilling campaign


Hub

Player 1 2 3

Value matrix a

b

c

Total

Player 1 2 3

Loss matrix a

b

c


Hub

Player 1 2 3

Value matrix a 112.5 102.5 97.0

b

c

Total

Player 1 2 3

Loss matrix a

b

c


Hub

Player 1 2 3

Value matrix a 112.5 102.5 97.0

b 153.0 143.0 112.0

c 178.8 208.8 100.0

Total 444.3 454.3 309.0

Hub

Player 1 2 3

Loss matrix a

b

c


Hub

Player 1 2 3

Value matrix a 112.5 102.5 97.0

b

c

Total

Hub

Player 1 2 3

Loss matrix a

b

c


Hub

Player 1 2 3

Value matrix a 112.5 102.5 97.0

b 153.0 143.0 112.0

c

Total

Hub

Player 1 2 3

Loss matrix a

b

c


Hub

Player 1 2 3

Value matrix a 112.5 102.5 97.0

b 153.0 143.0 112.0

c 178.8 208.8 100.0

Total 444.3 454.3 309.0

Hub

Player 1 2 3

Loss matrix a

b

c


Hub

Player 1 2 3

Value matrix a 112.5 102.5 97.0

b 153.0 143.0 112.0

c 178.8 208.8 100.0

Total 444.3 454.3 309.0

Hub

Player 1 2 3

Loss matrix a 10.0

b 10.0

c 0.0


Hub

Player 1 2 3

Value matrix a 112.5 102.5 97.0

b 153.0 143.0 112.0

c 178.8 208.8 100.0

Total 444.3 454.3 309.0

Hub

Player 1 2 3

Loss matrix a 0.0 10.0 15.5

b 0.0 10.0 41.0

c 30.0 0.0 108.8


0

20

40

60

80

100

120

0 20 40 60 80 100 120

Loss

pla

yer

BLoss player A

Hub 1 Hub 2 Hub 3

0

5

10

15

20

25

30

35

40

45

0 20 40 60 80 100 120

Loss

pla

yer

B

Loss player A

Hub 1 Hub 2 Hub 3

Lose-Win

Lose-Lose

Win-LoseWin-Win

Game findings

• Recognition of allies and rivals

• A player can suffer from additional information

– Preferences are aligned on the basis of expected values

– Conflicting preferences arise when uncertainty is resolved



• Three games

• Oil price setting

• Investing in one field or the next

• Choosing a regional hub


• Conclusions


Ronald HowardFormulated “decision analysis”

John von NeumannMinimising Maximum loss (MinMax Theorem)Backward inductionFirst formal treatment Game theory

Oskar MorgensternFirst formal treatment Game theory


Game theory

Player A – Decision analysis

Player B – Decision analysis

Player C – Decision analysis Options

Decision analysis

Players

Uncertainties


• Three games





• Conclusions

A game-theoretic framework is relevant if:

1. Multiple players, each of which maximises an objective

2. At least one player can chose between alternatives

3. The payoff to each player depends on the combinations of strategies chosen

by all players


Game theory and E&P economic analysis

• Fellow players can make or break the project for an individual player

• The impact of competing players has been largely ignored

• Modelling complexity: multiple players and uncertainty

game theory focus group

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