Application of real options to valuation and decision making in the petroleum E&P industry

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Application of real options to valuation and decision making in the petroleum E&P industry

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dc.contributor.advisor Van Rensburg, W. C. J.
dc.contributor.advisor Sepehrnoori, Kamy, 1951-
dc.creator Xu, Liying, 1962-
dc.date.accessioned 2012-07-17T18:43:32Z
dc.date.available 2012-07-17T18:43:32Z
dc.date.created 2010-12
dc.date.issued 2012-07-17
dc.date.submitted December 2010
dc.identifier.uri http://hdl.handle.net/2152/ETD-UT-2010-12-2549
dc.description.abstract This study is to establish a binomial lattice method to apply real options theory to valuation and decision making in the petroleum exploration and production industry with a specific focus on the switching time from primary to water flooding oil recovery. First, West Texas Intermediate (WTI) historical oil price evolution in the past 25 years is studied and modeled with the geometric Brownian motion (GBM) and one-factor mean reversion price models to capture the oil price uncertainty. Second, to conduct real options evaluation, specific reservoir simulations are designed and oil production profile for primary and water flooding oil recovery for a synthetic onshore oil reservoir is generated using UTCHEM reservoir simulator. Third, a cash flow model from producing the oil reservoir is created with a concessionary fiscal system. Finally, the binomial lattice real options evaluation method is established to value the project with flexibility in the switching time from primary to water flooding oil recovery under uncertain oil prices. The research reaches seven conclusions: 1) for the GBM price model, the assumptions of constant drift rate and constant volatility do not hold for WTI historical oil price; 2) one-factor mean reversion price model is a better model to fit the historical WTI oil prices than the GBM model; 3) the evolution of historical WTI oil prices from January 2, 1986 to May 28, 2010 was according to three price regimes with different long run prices; 4) the established real options evaluation method can be used to identify the best time to switch from primary to water flooding oil recovery using stochastic oil prices; 5) with the mean reversion oil price model and the most updated cost data, the real options evaluation method finds that the water flooding switching time is earlier than the traditional net present value (NPV) optimizing method; 6) the real options evaluation results reveals that most of time water flooding should start when oil price is high, and should not start when oil price is low; and 7) water flooding switching time is sensitive to oil price model to be used and to the investment and operating costs.
dc.format.mimetype application/pdf
dc.language.iso eng
dc.subject Real options
dc.subject Petroleum E&P
dc.subject Decision making
dc.subject Price model
dc.subject Water flooding
dc.subject Switching time
dc.subject Mean reversion
dc.title Application of real options to valuation and decision making in the petroleum E&P industry
dc.date.updated 2012-07-17T18:44:02Z
dc.identifier.slug 2152/ETD-UT-2010-12-2549
dc.description.department Petroleum and Geosystems Engineering
dc.type.genre thesis
dc.type.material text
thesis.degree.department Petroleum and Geosystems Engineering
thesis.degree.discipline Petroleum Engineering
thesis.degree.grantor University of Texas at Austin
thesis.degree.level Doctoral
thesis.degree.name Doctor of Philosophy

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