A STUDY ON THE ECONOMIC ANALYSIS FRAMEWORK OF THE ARCTIC ENERGY PLANT CONSTRUCTION PROJECT

Abstract

The construction projects in the Arctic region are considered highly uncertain due to the extremely cold construction environment. In this study, we presented an economic analysis framework applying rainbow options that can consider multiple uncertainties. The economic feasibility of oil & gas plant construction projects is mainly affected by fluctuation in oil price and construction cost. Thus, we considered oil price and construction cost fluctuation as main uncertainties. The proposed framework consists of five steps and aimed to be validated through a case study conducted in the Canadian context: (1) estimate construction cost uncertainty (estimate the volatility of construction cost with Monte-Carlo Simulation); (2) estimate oil price uncertainty (estimate the volatility of oil price with geometric Brownian motion); (3) Economic data can be categorized into project data and market data, and detailed data is defined and quantified; (4) the economic feasibility of the project is assessed using the quadrinomial lattice method, which is one of the techniques used to calculate real options; and (5) optimize project decision making. The research findings hold significant meaning as we propose a framework for evaluating the economic feasibility of an energy plant construction project using rainbow options. Furthermore, it is anticipated that the utilization of the proposed framework can enhance the profitability and make a significant contribution to investors planning to embark on energy plant construction projects.