Impact of the Behavior of the Underlying Assets on the Value of a Petroleum Project Under the Theory of Real Options: Case of GBM and MR Process

Abstract

During this article we will discuss the problem behaviour of the value of the underlying asset, highlighting a central issue, what is the impact of different models that describe the behaviour of the value of underlying assets on the value of the oil project? The literature on real options is based on an assumption that the value of the underlying variable, cost of production of hydrocarbons or other relevant variables stochastic, following a process of geometric Brownian motion, GBM (Paddock, Siegel and Smith, 1988). In fact, most empirical research: Consider the initial investment decision but neglect the flexibility of operating the project; Suppose that the price of oil is stochastic, but unaware of the uncertainty about the costs of production and reserves of hydrocarbons; Suppose that oil prices follows a process of Brownian motion. The evolution of three variables, prices, production costs and quantities of reserves of hydrocarbons are presented in this article. The value of managerial flexibility is appreciated in this article using data on planned exploration and production of hydrocarbons by a TUNISIAN oil firm.