Environmental and economic multi-objective real options analysis: Electrification choices for field development investment planning

Abstract

Hydrocarbons combustion is one of the primary sources of greenhouse gas emissions, causing climate change. As large volumes of gas are burned to power the energy-consuming oil and gas production on offshore platforms, the Norwegian petroleum industry contributes significantly to the country’s emissions, making it a target for environmental regulations. Hence, Norwegian petroleum companies are facing the challenge of finding solutions to comply with increasing environmental requirements while being economically feasible. Offshore platforms electrification helps to reduce carbon emissions, but relevant investment decisions are complicated by uncertainty related to market fluctuations and regulations. In this study, we analyze how considering environmental and economic objectives simultaneously affects optimal investment strategies under uncertainty. We develop a novel methodology for determining the project value and the best investment policy for field development, considering several objectives and uncertain factors. By introducing multi-objective optimization into a real options investment valuation model, economic and environmental objectives are combined using the weighted sum method. The optimization model allows to determine trade-offs between the objectives of the project along with a flexible investment policy. Such optimal solutions result in a significant decrease in carbon emissions at only a marginal reduction in economic value.