Gas Exploration (15 points) A local natural gas exploration company drills for s
ID: 3361473 • Letter: G
Question
Gas Exploration (15 points) A local natural gas exploration company drills for shale gas in the Appalachian Basin of Western Pennsylvania. Shallow wells of about 4000 feet are fairly inexpensive to drill and relatively low risk. With the high price of natural gas, there is an interest in going after deeper deposits at about 15,000 feet. Not only does this cost much more, but the actual cost is uncertain because of unknown geological conditions that may be encountered. 6. The cost of a deep well is equally likely to be $8,000,000, $9,000,000, $10,000,000, 11,000,000 or $12,000,000. The revenue is also unknown with a payout as follows: $100,000,000 with a probability of 10 $10,000,000 with a probability of 30 $0 (a dry hole) with a probability of.60 Give Process Generators for the cost and revenue probability distributions above. Using random numbers from column 1 and column 2 of the Random Number Table in the course slides for revenue and cost respectively, simulate 10 replications of profit by hand for drilling one well. Based on your simulation, give an approximation of the Risk Profile. Also, based on your 10 trials, what is the expected profit? In addition, what is the probability of a negative profit (i.e., losing money) of drilling one deep well? (Handwrite answer. 5 points) a) Simulate using EXCEL with 1000 replications to estimate the expected profit. Also, what is the probability of a negative profit (i.e., losing money) of drilling one deep well? How does your answer in part (b) compare to part (a)? (Submit via Blackboard. 5 points) b) Simulate using EXCEL with 1000 replications to estimate the probability of a negative total profit (i.e., losing money) if the company drills 40 deep wells. Assume independence of costs and payouts among the 40 wells. How does this probability compare to the probability of drilling one well n part (b),. (Submit via Blackboard. 5 points) c)Explanation / Answer
a)
Since all the 5 cost scenarios are likely, their individual probability is 0.2.
Assign 2 digits for each of 0 to 9 digits for every scenario.
Since the probability of 100 million is 1 in 10, assign 0
the probability of 10 million is 3 in 10 assign the digits 1,2,3
the probability of 0 million is 6 in 10 assign the digits 4,5,6,7,8,9
steps for getting cost and revenue for 10 trials
1. From column1 , go to the first row
2. pick one digit.
3. Based on the digits assigned to the revenue scenario table above, get the revenue value
4. Repeat steps 2,3 if 10 trials are not done.
If 10 trials completed, end.
Do the same 4 steps based on the cost table instead of revenue table.
brakcets indicate negative value
Summary is as follows
probability of negative profit is 70%
expected profit is the average of 10 profits i.e. -6 million dollars.
b)
use data analysis addin and Random Number Generation.
show the value and probability range
Number of random numbers is 1000
show the output range starting location
do it for revenue and cost separately.
In our case after doing 1000 trials in excel
the probability of losing money is 0.721
the expected profit is 3 million dollars.
c)
use data analysis addin and Random Number Generation.
show the value and probability range
Number of random numbers is 1000
Number of variables as 40
show the output range starting location
It will output 1000 x 40 matrix for revenue based on probability distribution
Do it for revenue and cost separately.
profit = revenue - profit (for each of 1000 x 40 cells)
Now you will have1000 x 40 cells for profits.
count the negative values for each of 40 columns.
probability of negative profit (average of 40 probabilities) i.e.e 72.2%
Cost (in millions) Probability Digits $8 0.2 0,1 $9 0.2 2,3 $10 0.2 4,5 $11 0.2 6,7 $12 0.2 8,9Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.