Valuation of Real Options in Crude Oil Production
Oil producers are going through a hard period. They have a number of real options at their disposal. This paper addresses the valuation of two of them: the option to delay investment and the option to abandon a producing field. A prerequisite for this is to determine the value of a producing well. F...
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| Format: | Article |
| Language: | English |
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MDPI AG
2017-08-01
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| Series: | Energies |
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| Online Access: | https://www.mdpi.com/1996-1073/10/8/1218 |
| _version_ | 1797999525862834176 |
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| author | Luis Mª Abadie José M. Chamorro |
| author_facet | Luis Mª Abadie José M. Chamorro |
| author_sort | Luis Mª Abadie |
| collection | DOAJ |
| description | Oil producers are going through a hard period. They have a number of real options at their disposal. This paper addresses the valuation of two of them: the option to delay investment and the option to abandon a producing field. A prerequisite for this is to determine the value of a producing well. For this purpose we draw on a stochastic model of oil price with three risk factors: spot price, long-term price, and spot price volatility. This model is estimated with spot and futures West Texas Intermediate (WTI) oil prices. The numerical estimates of the underlying parameters allow calculate the value of a producing well over a fixed time horizon. We delineate the optimal boundary that separates the investment region from the wait region in the spot price/unit cost space. We similarly draw the boundary governing the optimal exercise of the option to abandon and the one governing the active/inactive production decision when there is no such option. |
| first_indexed | 2024-04-11T11:06:03Z |
| format | Article |
| id | doaj.art-29fa4d8cdf0d4ac8a47ac22d24e54c49 |
| institution | Directory Open Access Journal |
| issn | 1996-1073 |
| language | English |
| last_indexed | 2024-04-11T11:06:03Z |
| publishDate | 2017-08-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Energies |
| spelling | doaj.art-29fa4d8cdf0d4ac8a47ac22d24e54c492022-12-22T04:28:21ZengMDPI AGEnergies1996-10732017-08-01108121810.3390/en10081218en10081218Valuation of Real Options in Crude Oil ProductionLuis Mª Abadie0José M. Chamorro1Basque Centre for Climate Change, Sede Building 1, 1st Floor, Scientific Campus, University of the Basque Country, 48940 Leioa, SpainDepartment of Financial Economics II and Institute of Public Economics, University of the Basque Country, Av. Lehendakari Aguirre 83, 48015 Bilbao, SpainOil producers are going through a hard period. They have a number of real options at their disposal. This paper addresses the valuation of two of them: the option to delay investment and the option to abandon a producing field. A prerequisite for this is to determine the value of a producing well. For this purpose we draw on a stochastic model of oil price with three risk factors: spot price, long-term price, and spot price volatility. This model is estimated with spot and futures West Texas Intermediate (WTI) oil prices. The numerical estimates of the underlying parameters allow calculate the value of a producing well over a fixed time horizon. We delineate the optimal boundary that separates the investment region from the wait region in the spot price/unit cost space. We similarly draw the boundary governing the optimal exercise of the option to abandon and the one governing the active/inactive production decision when there is no such option.https://www.mdpi.com/1996-1073/10/8/1218oil pricestochastic processesfutures pricesleast-squares Monte Carlooption to delayoption to abandon |
| spellingShingle | Luis Mª Abadie José M. Chamorro Valuation of Real Options in Crude Oil Production Energies oil price stochastic processes futures prices least-squares Monte Carlo option to delay option to abandon |
| title | Valuation of Real Options in Crude Oil Production |
| title_full | Valuation of Real Options in Crude Oil Production |
| title_fullStr | Valuation of Real Options in Crude Oil Production |
| title_full_unstemmed | Valuation of Real Options in Crude Oil Production |
| title_short | Valuation of Real Options in Crude Oil Production |
| title_sort | valuation of real options in crude oil production |
| topic | oil price stochastic processes futures prices least-squares Monte Carlo option to delay option to abandon |
| url | https://www.mdpi.com/1996-1073/10/8/1218 |
| work_keys_str_mv | AT luismaabadie valuationofrealoptionsincrudeoilproduction AT josemchamorro valuationofrealoptionsincrudeoilproduction |