Compound real options incorporated with a stochastic approach for evaluating an uncertainty in petroleum exploration

Changhyup Park, J. M. Kang, B. Min

Research output: Contribution to journalArticlepeer-review

6 Scopus citations

Abstract

The article presents compound real options to examine the effects of uncertainties on the strategic decision-making in petroleum exploration. The evaluating approach is based on real option valuation but incorporated with decision tree and stochastic discounted cash-flow to demonstrate the changeable environment. Various uncertainties are employed to represent the characteristics of exploration, related to market and technical conditions. The model yields the reliable evaluation and investigates the exploring characteristics efficiently. The more uncertain the project is, the more volatile it is by including the jumping terms in price changes, non-deterministic production profiles, and fiscal terms successively. The model can measure the uncertainties quantitatively by reflecting them on the profitability. It confirms that petroleum exploration is very volatile so that the adequate managing decision plays an important role in economic evaluation.

Original languageEnglish
Pages (from-to)252-262
Number of pages11
JournalEnergy Sources, Part B: Economics, Planning and Policy
Volume8
Issue number3
DOIs
StatePublished - 2013

Keywords

  • Compound real option
  • Petroleum exploration
  • Stochastic
  • Strategic decision
  • Uncertainty

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