Comparative statics for real options on oil: What stylized facts?

Lund, Daryl; Nymoen, Ragnar

doi:10.1080/0013791x.2017.1283001

Cited by 6 publications

(2 citation statements)

References 60 publications

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“…Furthermore, the transaction value of assets is largely determined through the game between the two sides and the transaction value of options is hard to be estimated. In addition, some studies [16] reject two stylized facts of real options on oil: one is that the correlation of the returns on oil and the stock market is positive; the other is that it is invariant to changes in oil price volatility. ey state that the widespread idea that higher volatility leads to increased value and postponed investment is not necessarily valid.…”

Section: Literature Reviewmentioning

confidence: 99%

Study on the Valuation Method for Overseas Oil and Gas Extraction Based on the Modified Trinomial Tree Option Pricing Model

Liu

Luo

et al. 2020

Mathematical Problems in Engineering

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Wandering of oil prices at lower values and the bitter reality have forced people to look for a more accurate valuation method for overseas oil and gas extraction of China. However, the currently available resource classification method, discount cash flow (DCF) method, and real option method all suffer from their own disadvantages. This paper identifies multiple uncertainty factors such as oil prices and reserves. It then investigates the transmission mechanism of how each uncertainty factor impacts the oil and gas extraction value and quantifies the transmission efficiency. The probability distribution patterns of each uncertainty factor have been determined; the trinomial tree option pricing model is modified, with consideration upon the nonstandardness of the probability distribution. Decision points and strategies space are designed in accordance with the practical oil and gas production; and the Bermuda option is adopted to replace the conventional decision-based tree model with the probability-based tree. Finally, a backward algorithm is developed to calculate the probability at each decision point, which avoids difficulties in determining the asset volatility ratio; and a case study is presented to demonstrate application of the proposed method. Results show that decision rights for overseas investment are valuable. The value of extraction does not yet necessarily grow with higher uncertainty, and instead, it is under joint effects of the cash flow and strategy space. So, valuation should incorporate the composite value of future cash flow and decision rights. Volatility of the value of extraction is not solely dependent on the oil price, but affected by multiple factors. Similar to the Bermuda option, the decision-making behavior for oil and gas extraction occurs only at finite decision points, to which the trinomial tree option pricing model is applicable. The adoption of probability distribution can to a great extent exploit the uncertain information. Replacement of the decision-based tree with the probability-based tree provides more accurate probability distribution of the calculated value of extraction, and moreover the disperse degree of the probability can reflect how high risks are, which is conducive to decision-making for investment.

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Section: Literature Reviewmentioning

confidence: 99%

Study on the Valuation Method for Overseas Oil and Gas Extraction Based on the Modified Trinomial Tree Option Pricing Model

Liu

Luo

et al. 2020

Mathematical Problems in Engineering

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“…In this exercise we have also evaluated the possible cost of switching between production and suspension or viceversa. They are basically related to the cost of hiring and firing workforce and have been found to be negligible, because of the small dimension of shale oil rigs.14 For exampleGenc [2017] uses r = 2%, whileLund and Nymoen [2018] prefer r = 4%.15 The results of this analysis are available upon request.16 In the sources we considered the production cost ranges from a minimum of 16 million to a maximum of 28 million dollars .17 The detailed results of this analysis are available upon request.…”

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Mothballing in a Duopoly: Evidence from a (Shale) Oil Market

et al. 2020

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The mothballing option has been studied in the literature, but mainly in decision theoretic frameworks. This paper looks at it from a strategic point of view and applies it to an incumbent-entrant framework. In particular, based on the recent strategic interactions between OPEC and the shale oil industry, we conduct a case study where the incumbent OPEC is a exible producer that competes with a representative shale oil firm. Upon entry, the latter produces a fixed amount but it can apply the mothballing option in times of low demand. Our main results are threefold. First, we find that under low demand uncertainty, the mothballing option has a negative effect on the value of the entrant. Second, a large market share of the entrant will stimulate mothballing, caused by a so-called squeeze strategy of the incumbent. Third, our empirical analysis of the (shale) oil market learns that a higher demand elasticity induces mothballing.

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A review of the operations literature on real options in energy

Nadarajah

Secomandi

2023

European Journal of Operational Research

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Comparative statics for real options on oil: What stylized facts?

Cited by 6 publications

References 60 publications

Study on the Valuation Method for Overseas Oil and Gas Extraction Based on the Modified Trinomial Tree Option Pricing Model

Study on the Valuation Method for Overseas Oil and Gas Extraction Based on the Modified Trinomial Tree Option Pricing Model

Mothballing in a Duopoly: Evidence from a (Shale) Oil Market

A review of the operations literature on real options in energy

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