Valuation of Undeveloped Oil Reserves with Option Pricing Model
Article from: OGEL 4 (2006), in Roundup of Articles
Executive Summary
Modern financial theories such as option theory are increasingly being used to evaluate the economic viability of oil and gas projects. The stimulus for the use of this approach is the limitations of Discounted Cash Flow (DCF) methods such as NPV and IRR. These methods assume that the project is of a "now or never" nature. In fact, this is not the case; as an investor, one has many choices, such as to defer the project if it is not seen as being economically viable. One can also choose to expand or increase production capacity if the price of the commodity rises. The ...