1. This question has two parts.After you have developed an answer for Part A, read Part B and answer the questions that follow.

Part A

In 2002, a young geologist was preparing a bid recommendation for an oil tract on the outer continental shelf in the Gulf of Mexico.He suspected that this new tract of land contained a large accumulation of oil because the adjacent tract contained several productive wellswells that his company, Oil Ventures International (OVI), already owned.The geologist estimated the amount of oil the tract was likely to contain and what competitors were likely to bid; then, given these estimates, he recommended a bid of $5 million. No competitors had neighboring tracts, so none suspected a large accumulation of oil.

Surprisingly, OVI's senior management ignored the recommendation and submitted a bid of $20 million, and the company won the tractover the next highest bid of $750,000.

a.If the board of directors hired you as a management consultant to review the bidding procedures at OVI, how would you proceed?What questions would you ask?Where would you begin your investigation?

Part B

After his company won the auction, our geologist increased the company's oil reserves by the amount of oil estimated to be in the tract.But then the company drilled a well that was essentially dry.Furthermore the company could access what little oil there was in the new tract through existing wells so the acquisition did nothing to increase the size of the company's oil reserves. Our geologist reevaluated the reservoir map and then reduced the reserve estimate by two thirds.Senior management however rejected the revised estimate and directed the geologist to do what he could to increase the size of the estimated reserves.So he revised the reservoir map again and added "additional" reserves to the company's asset base.

a.With this new information, does your answer to Part A change?How would you go about "fixing the problem?"