Sequential investment planning for complex oil development projects

Abstract

In this thesis, we consider sequential real investment decisions for the development of discovered oil prospects. Following a decision analysis approach, we propose a methodology to explore the upside of a dynamic drilling strategy, where there is a significant uncertainty about the reservoir complexity. We introduce the notion of information lag, whereby the decision-maker receives the information with a certain delay after each drilling is completed. In an illustrative case study, we apply our proposed methodology on a single reservoir to characterize the value of flexibility and to describe the relative impact of the information lags, in the context of an extensive drilling plan. We also provide several extensions of this case study in order to show how this methodology would be extended in a more comprehensive decision framework. Topics include choosing the optimal production capacity, valuing an initial test opportunity, and developing a field with multiple reservoirs. Our results indicate that flexible thinking may be a significant source of value to the projects. However, the incremental value might be over-rated if information lags are not appropriately included in the analysis.