Petroleum property valuation: A binomial lattice implementation of option price theory

Journal Article · Thu Dec 31 23:00:00 EST 1992 · Energy Journal; (United States)

DOI:https://doi.org/10.5547/ISSN0195-6574-EJ-Vol14-No2-1· OSTI ID:7095635

Pickles, E ^[1]; Smith, J L ^[2]

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1. Marathon Oil Co., Houston, TX (United States)
2. Univ. of Houston, TX (United States)

The authors take a simple tutorial approach to explain how option valuation can be applied in practice to the petroleum industry. They discuss a simple spreadsheet formulation, demonstrate how required input data can be extracted from market information, and give several exploration and development examples. Under the market and fiscal conditions described they derive the value of discovered, undeveloped reserves projected to result from offshore licensing in the United Kingdom, and they show how to determine the maximum amount that should be committed to an exploration work program to find those reserves. Lease-bidding and farm-out applications are briefly described. The authors recommend option valuation as an alternative to discounted cash flow analysis in situations where cash flows are uncertain and management has operating flexibility to adjust investment during the life of the project, and point to further work needed to fully value nested or embedded options. 10 refs., 9 figs.

• OSTI ID: 7095635
• Journal Information: Energy Journal; (United States), Journal Name: Energy Journal; (United States) Vol. 14:2; ISSN ENJODN; ISSN 0195-6574
• Country of Publication: United States
• Language: English

Related Subjects

29 ENERGY PLANNING, POLICY, AND ECONOMY
290201* -- Energy Planning & Policy-- Economics-- (1992-)
ECONOMIC ANALYSIS
ECONOMICS
ENERGY SOURCES
FOSSIL FUELS
FUELS
INDUSTRY
PETROLEUM
PETROLEUM INDUSTRY
PROPERTY VALUES
RESERVES
RESOURCES