Real options for risk management in petroleum development investments

Chorn, Larry; Shokhor, S.

doi:10.1016/j.eneco.2006.03.002

Cited by 42 publications

(22 citation statements)

References 5 publications

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“…T HE FINANCIAL evaluation of offshore petroleum assets is plagued with several problems that make traditional methods of analysis inadequate [1]. The volatility of hydrocarbon prices, costs, and demands coupled with the long projectlife of these ventures and inherent geological uncertainties of field characteristics lead to a wide range of possible scenarios.…”

Section: Introductionmentioning

confidence: 99%

An Integrated Approach to State Decision-Making in Upstream Hydrocarbon Operations With Application to Lebanon

Maddah

Al‐Hindi

Yassine

et al. 2014

IEEE Trans. Eng. Manage.

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In the exploration, development, and production of hydrocarbons, a sovereign state faces conflicting challenges: maximizing its welfare while maintaining an attractive investment environment for developers. The terms and conditions of a production sharing contract (PSC) between the government and international oil companies (IOC) are usually finalized prior to the commencement of operations and with partial knowledge of the reserve level. In addition, hydrocarbons have several potential uses. This paper formulates an optimization model that assists the government in these challenges. Given an initial estimated reserve volume and hydrocarbon price, the model determines values for both the PSC's key parameters and the allocation of the government share into different uses to generate the maximum benefit to the state while providing an acceptable rate of return for the IOC. The model is applied to Lebanon. We find that an optimal PSC for Lebanon involves no royalty for all reasonable values of potential reserves, and a high cost recovery and profit share for low reserve volumes. In addition, sensitivity analysis indicates that the preferred export mode is via the Arab pipeline, due to the low level of the current gas price and high cost of the alternative liquefied natural gas export mode.

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Section: Introductionmentioning

confidence: 99%

An Integrated Approach to State Decision-Making in Upstream Hydrocarbon Operations With Application to Lebanon

Maddah

Al‐Hindi

Yassine

et al. 2014

IEEE Trans. Eng. Manage.

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“…Although early applications of real options were mainly focused on studying the optimal timing for irreversible investment and natural resource projects (Brennan and Schwartz, 1985;Chorn and Shokhor, 2006), the range of application is being substantially extended to other areas (Schwartz and Trigeorgis, 2001) such as research and development, company valuation and M&As, intangible assets, etc. Amram and Kulatilaka (1999) present a portfolio of real option applications.…”

Section: Introductionmentioning

confidence: 99%

Real option valuation of free destination in long-term liquefied natural gas supplies

Rodríguez

2008

Energy Economics

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“…According to different criteria, however, there are multiple risk classification categories for global investments. In this paper, we explored five categories of global shale gas investment risks based on the empirical results [38][39][40][41][42][43][44][45] and characteristics of shale gas development [46]. Four categories involving economic, political, geological and technological aspects come directly from Zhang et al and Xi [42,45].…”

Section: Risk Identificationmentioning

confidence: 99%

Assessing Risk in Chinese Shale Gas Investments Abroad: Modelling and Policy Recommendations

Sun

Lee³

et al. 2016

Sustainability

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Abstract:As the shale gas revolution expands globally, the future potential and economic profits of overseas shale gas reserves have attracted the interest of Chinese investors. Overseas shale gas development is becoming an investment hotspot for Chinese oil companies. However, this multibillion-dollar venture is surrounded by a complex and uncertain environment. Therefore, this paper carries out an integrated and publicly available model for assessing risk in overseas shale gas investments. The purpose of this model is to address the index weight calculation and risk ranking and provide investor with risk information. In view of this, the comprehensive weights are obtained based on an analytic hierarchy process (AHP) and entropy weight methods; and the Technique for Order Preference by Similarity to Ideal Solution (TOPSIS) method is performed to rank target countries. First, the paper identities five categories of risks with full consideration of the economic risk, political risk, geological risk, technological risk, and internal managements risk. Based on the risk identification, the assessment index system is established and valued. Secondly, China is taken as an example nation to use this model to prove the effectiveness of the proposed model and help the investor make wise decisions. According to the results, low-risk countries, such as Canada, Argentina, United States, and Algeria can be considered to be future key targets of shale gas investment abroad, while investors should be more cautious of high-risk countries such as South Africa and Brazil. Finally, policy recommendations are proposed to optimize the overseas shale gas investments from both the government and investor perspectives.

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Real options for risk management in petroleum development investments

Cited by 42 publications

References 5 publications

An Integrated Approach to State Decision-Making in Upstream Hydrocarbon Operations With Application to Lebanon

An Integrated Approach to State Decision-Making in Upstream Hydrocarbon Operations With Application to Lebanon

Real option valuation of free destination in long-term liquefied natural gas supplies

Assessing Risk in Chinese Shale Gas Investments Abroad: Modelling and Policy Recommendations

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