• October 10th, 2017


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Athabasca Oil and Gas Corporation is a Canadian energy company with a focused strategy on
the development of thermal and light oil assets. Situated in Alberta’s Western Canadian
Sedimentary Basin, the company has amassed a significant land base of extensive, high quality
resources and is primarily concentrated on the exploration for, and sustainable development of,
bitumen from oil sands in the Athabasca region, and light oil and liquids-rich natural gas from
regions in northwestern Alberta.
Athabasca Oil and Gas Corporation is currently considering making a bid for a new oil
development contract to be awarded by the federal government. However, this site is located in
the southeastern part of Alberta and might require a new method of oil extraction as the
conventional method would hardly be very efficient. Athabasca Oil and Gas Corporation decided
to bid $200 million. The company realistically estimates that it has a 75% chance of winning the
contract with this bid. If Athabasca Oil and Gas Corporation wins the contract, it can choose one
of three options: develop a technologically new method for oil extraction, keep using the
existing method, or subcontract the processing to a number of smaller US and Canadian
If company uses the existing method, then the detailed forecast looks like this:
Outcomes Probability Profit/Loss ($ millions)
Great success 0.30 300
Moderate success 0.45 200
Some success 0.15 50
No success 0.10 ─ 75
As for the new method, the situation is less predictable. The company is carefully considering
just two outcomes, success and failure, though both with huge monetary values.
Outcomes Probability Profit/Loss ($ millions)
Success 0.30 700
Failure 0.70 ─ 250
The subcontract will give a guaranteed profit of $250 million.
Profits/losses listed above for the three options do not incorporate the supposed bid price of $200
The cost of preparing the contract proposal is $3 million. If the company does not make a bid, it
will invest in an alternative venture with a guaranteed profit of $50 million.
Athabasca Oil and Gas Corporation is considering hiring Calgary Geological Research Company
(CGRC) to estimate their chances with the new oil extraction method. CGRC experts will
provide a favourable report (go ahead with the new method) or unfavourable report (application
of the new method will hardly be successful). It is known that there is 90% chance that CGRC
provides favourable report given positive outcome. There is also 80% chance that CGRC
provides unfavourable repot given negative outcome. CGRC specialists need six months to
complete their analysis and request $5 million as they have to use expensive equipment and hire
additional staff.
Please perform an analysis of the problem facing the Athabasca Oil and Gas Corporation, and
prepare a report that summarizes your findings and recommendations. Include the following
items in your report:
1. A (simple) decision tree that shows the logical sequence of the decision problem given
the CGRC research information is not available.
2. A recommendation regarding what Athabasca Oil and Gas Corporation should do if the
CGRC information is not available.
3. A decision strategy that Athabasca Oil and Gas Corporation should follow if the research
is conducted based on the posterior probabilities and a revised decision tree.
4. A recommendation as to whether Athabasca Oil and Gas Corporation should employ
CGRC, along with the value of the information provided by the research firm and the
efficiency of this information.

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