Application of Portfolio Management to Optimize Capital Allocation in Oil and Gas Projects
Article from: OGEL 1 (2006), in Economic and Commercial Context for Oil, Gas and Energy Law
Abstract
Oil and gas companies are constantly faced with decisions on how to invest limited amounts of capital in order to maximize return. The traditional approach to select the projects is usually to rank all available projects using common measures such as NPV, IRR, or Profit to Investment ratio (PI) until all the available capital is exhausted. The main weakness of this traditional approach is that it maximizes expected value but ignores risk. In the capital market world, one method of capital allocation that takes explicit account of risk is the modern portfolio theory, ...