Economic valuation : where is the value of the Pirsaat Project from?

The value of an E&P project comes from the cash flows it produces. These cash flows are subject to the uncertainty of input parameters and are also affected by contingent decisions that change the course of the project. Three project valuation methods, discounted cash flow (DCF) method, Monte Carlo simulation and real option valuation (ROV) method, are utilized to evaluate a specific E&P project in the Pirsaat oil field in Azerbaijan. The DCF method and Monte Carlo simulation both follow predetermined paths, thus ignoring the value of managerial flexibility, also called options. As an extension of DCF, ROV can highlight the option values inherent in the project. Therefore, ROV provides more insights about the project value. However, there is no widely accepted ROV approach today. The integrated approach is adopted in this thesis, as it treats all sources of uncertainties as market uncertainty and technical uncertainty separately, thus more robust.