Today’s column continues with my critiques of Open Oil’s financial modeling of Guyana’s 2016 Production Sharing Agreement, PSA. To sum up the discussion at this stage, the first critique under discussion urges that a basic obligation of financial modeling studies is to amplify their reporting on the limited predictive power of such modeling simulations and their results. I do not want to involve non-modelers and/or my more general readership into the esoteric realms of financial modeling. The fact is however that the model used in the Open Oil exercise is one based on spreadsheet modeling, utilizing Microsoft Excel.
This approach has encountered widely recognized problems among analysts. This circumstance indicates itself in the title of Fairhirst’s (2009) study: “Six reasons your spreadsheet is NOT a financial model”. Such criticisms point out the “unrealistic implicit assumptions and internal inconsistencies” of several spreadsheet based models. Such observations also support the view expressed in my previous column that, all too often, modelers fail to state explicitly the full assumptions and limitations of the data, which they are inputting into their models.
