Optimal Investment Timing and Scale Choice of Overseas Oil Projects: A Real Option Approach

Abstract

This article presents a real option model for helping investors to determine the optimal investment timing and scale of overseas oil projects. The model is suitable for the highly uncertain environments in which many oil companies operate, where they have to suspend upstream investment, stop new oilfield construction, and wait for proper oil prices in order to avoid losses. Considering the uncertainty of oil prices and exchange rates, the results of analytical solutions presented in this paper show the critical oil price that can be seen as the investment threshold for triggering oilfield development as well as the optimal recoverable factor for every oil price level to indicate the optimal investment scale. Results of the case project show the critical oil price, which is 82.32 US dollar per barrel, and the selection of optimal investment scale. The article also demonstrates the impact of investment scale on investment timing in overseas oil projects. The policy implication from the case project is that investment decisions are finitely impacted by geological conditions. Besides, the existence of tax holiday directly contributes to a lower investment threshold. In addition, reducing unit operation cost can obviously enlarge optimal investment scale and initiate oil projects in a relatively low level of investment threshold.

Study of evaluation method for the overseas oil and gas investment based on risk compensation

“…As for the benefit evaluation, calculation of the net present value (NPV) by means of the discounted cash flow method is a practice accepted by most scholars and enterprises. On the basis of NPVs, a few scholars (Abadie and Chamorro 2017;Huang et al 2018;Zhou and Yan 2013) introduce the real options method to calculate the value of the investment decision making right and calculate the optimal time of investment. Meanwhile, some other scholars (Gurgel et al 2017;Liu and He 2008a, b;Zekri and Jerbi 2002) use NPVs to invert some economic limit parameters (such as the limit well density, well spacing, recovery rate and steam injection rate), which presents no breakthrough in a view of the discounted cash flow method.…”

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

“…Transactions of oil and gas assets are characterized by their small quantity and discontinuation, and thus the value volatility ratio cannot be directly calculated. Generally, the real option method [12,14,15] uses the oil price fluctuation to represent the undulation of the oil and gas asset value, between which the consistency has not been confirmed yet. In fact, the value of oil and gas assets is not only related to oil prices but also related to many other factors such as the level of risks associated with the resources, the local political and economic status, and laws.…”

Internet of Things and Their Coming Perspectives: A Real Options Approach

“…The real options approach has been applied to a wide range of situations. Among the main relevant ones, we can find the valuation of pharmacological projects [50,51], the disruption risk in the supply chain [52,53], or the investment timing and capacity choice for energy projects [54][55][56][57] and its storage [58]. Likewise, real options assessment plays a significant role in long-term projects, for example, the assessment of future strategic actions by companies in a setting subject to the impact of climate change [59][60][61].…”