Where have all the profits gone?

Despite massive improvements in productivity due to technology advances, th e E&P industry has averaged a disappointing 7% return on net assets over th e last decade (less than its cost of capital). Its market capitalization re lative to the S&P 500, even at recent high oil and gas prices, is about hal f what it was a decade ago. A small scale, very simple case study suggests that at least part of the reason for this disappointing performance lies in the way that the industry conventionally allocates capital and selects por tfolios of projects. Ranking of projects by deterministic estimates of valu e and even some of the so-called advanced methods significantly overstates value, understates risk and misallocates capital by incurring unnecessary, uncompensated risks. Suggestions for improvements in the project selection/ capital allocation prices are offered.