Essay About Sargasso Shelf Bid And Conditional Probability Of Oil

Sargasso Shelf Bid for Tract 430
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Sargasso Shelf bid for Tract 430Executive Summary: I recommend a bid of $145.53 million for Tract 430.  This bid includes a 10% increase on the standard bidding practice in order to increases the company’s competitive strategy in the Sargasso Shelf region.  Proposal: I recommend that Fletcher Petroleum place a bid on Tract 430, in the Sargasso Shelf, for $145.53 million.  We determined the total expected returns, informed by the conditional probability of oil found in Tract 429, is roughly $265.58 million; making the standard industry bid for our company $132.30 million.  The 10% increase is a means to a more aggressive approach in this region.Analysis: If our competitor found a large oil reserve on Tract 429, then there is a 67% probability that there is a large oil reserve on Tract 430 and a 20% probability there is a small reserve. Therefore, if our competitor has found a large oil reserve on Tract 429, there is an 87% cumulative probability of oil being on Tract 430.  If our competitor found a small oil reserve on Tract 429, then there is a 33% probability that there is a large oil reserve on Tract 430 and a 52% probability of finding a small oil reserve.  Therefore, if our competitor has found a small oil reserve on Tract 429, there is an 85% cumulative probability that there is oil on Tract 430.  If our competitor has found no oil on Tract 429, then there is an 86% probability that there is no oil on Tract 430.  Bidding: Our competitor is at a distinct advantage by knowing the output potential and reserve size of Tract 429.  Given the analysis above that outlines the conditional probabilities of finding oil given oil reserves on Tract 429, we can estimate how aggressively our competitor will bid.  I believe that if our Company does not match or exceed our competitors bid, then we will lose this tract and become increasingly pushed out of the Sargasso Shelf region.  Last year, our competitor offered the industry standard of $131 million (one-half the expected total returns) and won the auction due to our inability to competitively bid.  Our conditional probability research indicates that our total expected return is $264.58 million for Tract 430.  I believe that our competitor will either bid the industry standard, or slightly higher if Tract 429 has proven fruitful.  I propose a 10% increased premium so that our bid may exceed our competitors bid.