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Facilities Evaluation under Uncertainty: Pricing a Refinery

Author

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  • Donald L. Keefer

    (Department of Decision and Information Systems, College of Business, Arizona State University, Tempe, Arizona 85287-4206)

Abstract

During a period of volatile oil prices and of refining margins that were frequently negative, an oil company was considering selling a large refinery that had already been shut down because of unfavorable economics. As a basis for price negotiations, management needed a ballpark figure for what the refinery would be worth to a potential buyer whose economic circumstances and utilization of the refinery might differ substantially from those of the current owner. An initial attempt at conventional economic analysis proved inadequate because of the large uncertainties involved. A quick, straight-forward analysis using probability trees and simple approximations from decision analysis identified a reasonable range of values for the refinery, thereby providing significant insights to management. This approach has potential for a variety of facilities-evaluation problems and for other engineering economic-evaluation problems involving substantial uncertainties.

Suggested Citation

  • Donald L. Keefer, 1995. "Facilities Evaluation under Uncertainty: Pricing a Refinery," Interfaces, INFORMS, vol. 25(6), pages 57-66, December.
    • Handle: RePEc:inm:orinte:v:25:y:1995:i:6:p:57-66
    DOI: 10.1287/inte.25.6.57
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    Citations

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    Cited by:

    1. Ben Ewing & Erin Baker, 2009. "Development of a Green Building Decision Support Tool: A Collaborative Process," Decision Analysis, INFORMS, vol. 6(3), pages 172-185, September.
    2. Donald L. Keefer & Craig W. Kirkwood & James L. Corner, 2004. "Perspective on Decision Analysis Applications, 1990–2001," Decision Analysis, INFORMS, vol. 1(1), pages 4-22, March.
    3. Zhou, P. & Ang, B.W. & Poh, K.L., 2006. "Decision analysis in energy and environmental modeling: An update," Energy, Elsevier, vol. 31(14), pages 2604-2622.
    4. Jeffrey S. Stonebraker, 2002. "How Bayer Makes Decisions to Develop New Drugs," Interfaces, INFORMS, vol. 32(6), pages 77-90, December.
    5. Jeffrey S. Stonebraker & Donald L. Keefer, 2009. "OR Practice---Modeling Potential Demand for Supply-Constrained Drugs: A New Hemophilia Drug at Bayer Biological Products," Operations Research, INFORMS, vol. 57(1), pages 19-31, February.

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