Real options valuation for petroleum investments

Abstract

In many instances, oil companies struggle with decisions on petroleum investment. The difficulty partially stems from uncertainties in many of the inherent variables. Conventional investment methods often fail to properly identify available opportunities. Real Options Valuation involves a methodology for evaluating the value of an opportunity, leading to a strategic decision in an uncertain environment. In this study, two petroleum cases are considered, a technical uncertainty dominated case and a market uncertainty dominated case. Both cases demonstrate the fuctionality of the Real Options approach.