Abstract
Abstract Option-pricing theory has moved from the financial markets mainstream to the decision making process for upstream projects in the petroleum industry, taking shape as Real Option Valuation (ROV) techniques. It is proposed herein to employ option-pricing theory for selecting the best alternative among different execution plans (or competitive technology) for an offshore oilfield development. Introduction Current economic models that support the decision-making process are not always capable of indicating and accounting for the benefits of flexible field development plans (ref 1). The economic result of a project is not usually predictable, and therefore future uncertainty plays an important role into the valuation exercise. Hence a technology that possesses greater flexibility should be more attractive than a less flexible alternative. For some time managerial intuition has been alone in stating that flexibility is more attractive from an economic standpoint, not anymore. Real Options Valuation techniques are used to assess and inform management the correct value of flexibility. Flexibility to react to new information as it arrives has a considerable value to the company so it is not locked to an execution path that has been set maybe several years ago. A methodology that supports the decision-making process for selecting the optimum field development plan for an offshore oilfield is proposed in this paper. In this methodology ROV is presented as a tool that builds on the Discounted Cash Flow (DCF) techniques used extensively for economic evaluation. It highlights ROV's importance when comparing different technologies and field development plans for developing an offshore oilfield, and why it should be used instead of simple DCF analysis. Discounted Cash Flow DCF techniques are used to calculate the Present Value (PV) of a certain future income or expense. The most common approach to evaluate a field development plan is to elaborate for a given project its cash flow, where the future project expenses and revenues are accounted for (ref 2). All different alternatives to develop a field will have its cash flow built and be represented by its DCF parameters, usually the project Net Present Value (NPV). The project's NPV represents the sum of all expenditures and all revenues that the project will generate during its life. In this case the future inflows of cash generated by the sales of the field's products are positive values, whereas the expenditures to develop the field and to operate its facilities are negative values. If the company uses DCF only it will choose the alternative that possesses the largest NPV as the one to proceed to the execution phase. This is a completely static analysis that disregards any uncertainty to the future values presented in the DCF analysis. In order to assess the future uncertainty of the project's value the DCF techniques would employ other tools such as Monte Carlo simulations, decision trees, scenario analysis, etc.
Published Version
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