Exploration licences for energy companies to drill in the Beaufort Sea are overseen by Indigenous and Northern Affairs Canada. The licences typically grant the right to drill in a certain area of the seabed in return for pledging a sum of money that it plans to spend on drilling. If the company doesn’t spend that money on drilling within five years of the licence being issued, it must pay 25% of that sum of money to the government. If it does start drilling, it acquires drilling rights to that area of seabed forever.

An energy company has pledged $1.5 billion for drilling rights in a certain area of the Beaufort Sea on which it plans to drill a maximum of two wells. A survey of the area indicates that drilling will be successful with a probability of 0.3. Drilling a single well costs $0.75 billion and brings in a revenue of $2.1 billion. If the first well is successful, the chance of a second well being successful is increased from 0.3 to 0.9. If the first well is not successful, the chance of a second well being successful is decreased from 0.3 to 0.2.

a) Based on the expected profit (revenue minus cost), should the energy company drill its first well?

b) What would the revenue from a single well need to be (to an accuracy of two significant figures) in order for you to reverse your decision based on expected profit?

c) What other factors should the company take into account in addition to the expected value of the alternative actions?