Feasibility analysis of the development of an oil field: a real options approach in a production sharing agreement

Abstract

Purpose:

The aim of this research is to analyze the feasibility of developing a real oil field in Africa under a production sharing agreement, through the application of the real options theory.

Design/methodology/approach:

The research was conducted according to the principles of modeling and simulation, based on a structure that consists of three phases, in order to facilitate project feasibility analysis.

Findings:

Initially, according to the traditional method, we suggest that the decision-maker does not invest in the development of the field. However, by incorporating uncertainty into the decision-making process, other results were obtained. Although reduced, we attested that there is a likelihood of feasibility. Next, by using the binomial model to represent the process of oil barrel price diffusion, the asset value is calculated considering the flexibility of delaying the development of the field.

Originality/value:

The results show that, if a manager has the right to invest in the future and wait for better oil prices, postponing the development of an oil field adds value to his assets. The proposed method is a contribution that offers subsidies to improve decision-making processes to evaluate investments.

Keywords:
Feasibility analysis; real options; production sharing agreement; oil exploration and production