Background: As the senior executive in charge of exploration for High Octane Oil Co., you are constantly looking for projects that will add to the company's profitability— without increasing the company's risk. High Octane Oil is an international oil company with operations in Latin America, the Middle East, Africa, the United States, and Mexico. The company is one of the world's leading experts in deep-water exploration and drilling. High Octane currently produces 50 percent of its oil in the United States, 25 percent in the Middle East, 5 percent in Africa, 10 percent in Latin America, and 10 percent in Mexico. You are considering six projects from around the world.

Project 1—Your deep-water drilling platform in the Gulf of Mexico is producing at maximum capacity from the Valdez oil field, and High Octane's geological engineers think there is a high probability that there is oil in the Sanchez field, which is adjacent to Valdez. They recommend drilling a new series of wells. Once commercial quantities of oil have been discovered, it will take two more years to build the collection platform and pipelines. It will be four years before the discovered oil gets to the refineries.

Project 2—The Brazilian government has invited you to drill on some unexplored tracts in the middle of the central jungle region. There are roads to within 50 miles of the tract and British Petroleum has found oil 500 miles away from this tract. It would take about three years to develop this property and several more years to build pipelines and pumping stations to carry the oil to the refineries. The Brazilian government wants 20 percent of all production as its fee for giving High Octane Oil Co. the drilling rights or a $500 million up-front fee and 5 percent of the output.

Project 3—Your fields in Saudi Arabia have been producing oil for 50 years. Several wells are old, and the pressure has diminished. Your engineers are sure that if you were to initiate high-pressure secondary recovery procedures, you would increase the output of these existing wells by 20 percent. High-pressure recovery methods pump water at high pressure into the underground limestone formations to enhance the movement of petroleum toward the surface.

Project 4—Your largest oil fields in Alaska have been producing from only 50 percent of the known deposits. Your geological engineers estimate that you could open up 10 percent of the remaining fields every two years and offset your current declining production from existing wells. The pipeline capacity is available and, while you can only drill during six months of the year, the fields could be producing oil in three years.

Project 5—Some of High Octane's west Texas oil fields produce in shallow stripper wells of 2,000- to 4,000-foot depths. Stripper wells produce anywhere from 10 to 2,000 barrels per day and can last for six months or 40 years. Generally, once you find a shallow deposit, there is an 80 percent chance that offset wells will find more oil. Because these wells are shallow, they can be drilled quickly at a low cost. High Octane's engineers estimate that in your largest tract, which is closest to the company's Houston refinery, you could increase production by 30 percent for the next 10 years by increasing the density of the wells per square mile.

Project 6—The government of a republic in Russia has invited you to drill for oil in Siberia. Russian geologists think that this oil field might be the largest in the world, but there have been no wells drilled and no infrastructure exists to carry oil if it should be found. The republic has no money to help you build the infrastructure but if you find oil, it will let you keep the first five years' production before taking its 25 percent share. Knowing that oil fields do not start producing at full capacity for many years after initial production, your engineers are not sure that your portion the first five years of production will pay for the infrastructure they must build to get the oil to market. The republic also has been known to have a rather unstable government, and the last international oil company that began this project left the country when a new government demanded a higher than originally agreed-upon percentage of the expected output. If this field is in fact the largest in the world, High Octane's supply of oil would be ensured well into the 21st century.