Along with the maturation of main oil exploration and production (E&P) areas in the world, the industry has started to seek for new investment opportunities that have been considered unattractive so far. Among such opportunities might be small oil fields, whose low resource base makes the development marginal in terms of value. Such discoveries remain risky due to lower benefit–cost ratios and geological uncertainty that cannot be reduced so that the downside risk is eliminated. Nevertheless, they still can be attractive investment opportunities if the decision making process captures available operational flexibilities and opportunities to gather additional information allowing to tune the development plan during the course of a project. This can allow to mitigate downside risks associated with the reservoir uncertainty. In order to capture additional flexibilities and account for a possibility to change the course of the project within the investment valuation, the decision maker demands more advanced tools than a static discounted cash flow (DCF) approach, traditionally used in the industry. In this study, we analyze an opportunity to phase the drilling strategy into two stages as a tool that allows to optimize the field development under technical, cost and market uncertainties. We demonstrate how the decision maker can use additional information generated during the initial stage of the project in order to improve the future development plan by optimizing the decision to drill optional production wells. Using an algorithm based on the least-squares Monte Carlo (LSM) approach, we consider the waiting option to expand the production. We identify additional value created by the staged development strategy for a small offshore oil field, applying the methodology developed in Fedorov et al. (2020) to the synthetic benchmark model Olympus. We also extend the modelling approach of Fedorov et al. (2020) by accounting for cost uncertainty within the LSM algorithm. The underlying reservoir model allows us to realistically account for the effect of the decision to postpone drilling of the optional wells, on the field production. Our findings in this paper confirm the results of Fedorov et al. (2020), where an analytical modelling approach was used to account for reservoir uncertainty and forecast oil field production. Based on the Olympus case, we show that in case of staged development, the decision maker is able to increase the investment value due to the flexibility to avoid drilling additional wells in case of unfavourable oil price and/or production scenarios. Our conclusion, therefore, is that the staged development has a potential to be applied when the technical uncertainty represents high risk for the project economy.

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