Project Management in the Oil and Gas Industry

2.4 Decision 
Tree
The decision tree is one of the basic tools and keys to the managers in each 
decision-making process, as it is considered a sound and logical way that 
leads to the selection of the proper decision. Recently, I considered that a per-
son who does not know how to use a decision-making tree is a person living 
in an isolated cave. Here is proof that this method is the most common way.
The decision tree method is based on the probability of A, B, and C 
occurring and is calculated by:
Ps = P
A
× P
B
× P
C
This probability is presented in Figure 2.19. The probability of three 
events, A, B, and C, occurring at the same time will be presented by the 
intersection portion from the circle.
The core definition of risk is the probability of the event occurring 
multiplied by the output of this event: Risk Assessment = probability × 
consequence.
To explain the decision tree, let’s use dice and assume that the first player 
to throw the dice will earn 6,000 pounds only if the result is a six, but if it 
is another number, the player will lose the 1,000 pounds and the expected 
value calculation will be as follows. 
The possible emergence of a six is the probability of 1/6, so the expected 
value equation is as follows: 
Expected Value = (1/6) 6000 – (5/6) 1000 = 166.7 
A
B
C
Figure 2.19 Probability theory.

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72 Project Management in the Oil and Gas Industry
The general equation is as follows:
EV = P
s
C
s
– P
f
C
f
,
where P
s
and P
f
are the probability of success and probability of failure, 
respectively. C
s
and C
f
are the consequence in the case of success and fail-
ure, respectively.
We find that the probability of rolling a six is the one-sixth, but the 
expected value is 166.7, which is greater than zero, which is the expected 
value of risk. A high expected value indicates that the risk is better. 
Therefore, when compared with the display of the other player, our player 
found the expected value greater. 
This concept is the main decision-making tool that you would use if you 
have more than one project and you want to choose one of these projects. 
Therefore, it is important to be aware of calculating the probability of the 
success of each project as well as the value of that success.
Therefore, in applying the decision tree method to solve an engineering 
problem, for example, in the beginning of solving any engineering prob-
lem or in the feasibility study, one must specify for the expected outcomes 
and possible outcomes. To solve the engineering problem at the same time 
is to determine the likely success of all the possible outcomes. The focus 
should be to identify all the different ways to determine the likelihood of 
the event because it depends entirely on the experience from start to finish. 
Therefore, the experience is the key factor to the success of this method 
and can be simply explained by the manner of the following example. 
This example of Proverbs is common in the case of decisions in engi-
neering projects for the oil industry. You can imagine that all the deci-
sions of drilling for oil depend on the possibility and existence of oil in the 
ground, and the volume of the amount of ground reservoir varies from 
a large reservoir to a medium and to a small. Therefore, decision makers 
should use the decision tree to determine whether the drilling work will 
do or not.
Figure 2.20 is a case study on making the decision to drill or not. If you 
drill, you have two possible outcomes – that the well will be dry or that the 
well will have oil.
If you have an oil reserve, you have three possible outcomes. The reserve 
may be high, low, or medium. Every outcome has its probability of occur-
rence. It is noted from the figure that the total probability is equal to one, 
based on the probability theory. In each scenario of outcomes, calculate the 
present value (PV).
By multiplying the probability with the present value (PV), one will 
obtain the expected value (EV) and by adding all the values, you get the 

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Project Economic Analysis 73
expected value of the project which, in this case, is 4.6 million dollars, 
reflecting the weight of the project, and, therefore, helps you make a deci-
sion as to if you will be drilling at this site or direct investments to another 
reservoir in another location in the world if has the greatest expected value 
more than 4.6 million. 
For example, if you find that your investment in a country gives the 
expected value of eight million dollars, will you invest in any of the 
two countries? Naturally, you will not invest in the site in the example, 
but your decision will be clear that you will invest in the country 
that will give higher weight to the expected value of invested money.
Using the decision tree, potential problems you may encounter during 
the implementation of a project can be obvious and this is shown by the 
example in Figure 2.21, which is the same as the previous example with the 
possible delays in drilling wells. This usually happens in some countries 
0.1
1
2
3
4
5
0.02
110
2.2
6.0
1.2
–4.8
4.6
0.0
50
20
–6
0.0
P PV = EPV
0.12
0.06
0.8
1.0
1.0
0.2
0.8
0.3
0.6
High
Med.
Low