Real option analysis as a decision tool in oil field developments

Abstract

This thesis shows the applicability and value of real options analysis in developing an oil field, and how its use along with decision analysis can maximize the returns on a given project and minimize the losses. It focuses on how capacity flexibility, the option to change the scale of a project, can significantly add value to a project especially in situations where technical uncertainties exist in a field development. This thesis first analyzes the Sample and Rother field case study, looking at the original project team's assumptions and expectations, the key uncertainties and the final outcomes. It then offers up an alternate approach to the problem using real options analysis that would have added more value to the project. It shows that for the given case study, it would have been beneficial to obtain the option to add capacity to the field development. It also recommends the level of capacity flexibility to include that adds the most expected value to maximize gains and minimize losses for various development scenarios.