Utility Efficient Frontier: An Application in the Oil and Gas Industry |
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| Authors: | Mansoor Hamood Al-Harthy |
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| Institution: | (1) Petroleum and Chemical Engineering Department, Sultan Qaboos University, P.O. Box 33, Al-Khod, P.C. 123, Muscat, Sultanate of Oman |
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| Abstract: | Current practice shows that the use of portfolio and utility theory is very low among petroleum companies. This article advocates
the use of both portfolio theory and utility theory as decision-making tools to improve performance of oil and gas companies.
We introduce a model that can be practically used and applied in the oil and gas industry. This model generates an optimized,
efficient portfolio and, at the same time, enables the decision maker to incorporate his risk attitude and policy. This can
only be done by combining both the portfolio theory and utility theory through an approach called the utility mean-variance
model. A typical oil portfolio optimization problem is investigated by applying both portfolio and utility theories. Through
the utility mean-variance model, an efficient frontier that captures decision maker risk attitude is achieved. |
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| Keywords: | Oil and gas portfolio optimization utility theory risk-adjusted value decision making under uncertainty utility mean-variance |
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