Abstract
This article presents a real option model for helping investors to determine the optimal investment timing and scale of overseas oil projects. The model is suitable for the highly uncertain environments in which many oil companies operate, where they have to suspend upstream investment, stop new oilfield construction, and wait for proper oil prices in order to avoid losses. Considering the uncertainty of oil prices and exchange rates, the results of analytical solutions presented in this paper show the critical oil price that can be seen as the investment threshold for triggering oilfield development as well as the optimal recoverable factor for every oil price level to indicate the optimal investment scale. Results of the case project show the critical oil price, which is 82.32 US dollar per barrel, and the selection of optimal investment scale. The article also demonstrates the impact of investment scale on investment timing in overseas oil projects. The policy implication from the case project is that investment decisions are finitely impacted by geological conditions. Besides, the existence of tax holiday directly contributes to a lower investment threshold. In addition, reducing unit operation cost can obviously enlarge optimal investment scale and initiate oil projects in a relatively low level of investment threshold.
Highlights
From 2008 to 2017, international oil prices have declined and fluctuated
The upstream oil investment will obviously decrease if the low levels of oil price are sustained [1]
It demonstrates the impact of investment scale on investment timing in overseas oil projects
Summary
From 2008 to 2017, international oil prices have declined and fluctuated. The upstream oil investment will obviously decrease if the low levels of oil price are sustained [1]. In the era of low oil prices, many international oil companies, in an effort to avoid greater losses, have suspended upstream investment, stopped new oilfield construction, and waited for the recovery of oil prices. Compared with domestic oil projects, overseas projects are an ideal way for oil companies as it helps them to continuously expand for survival and seek international profits [3]. Oil companies are willing to seek investment opportunities for overseas projects
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