The Application Of Real Option Pricing Theory In The Analysis Of The Value Of Oil Development Projects

The investment in petroleum development project is time-consuming and irreversible, and has a high level of uncertainty which engenders opportunity value of the investment. The traditional decision-makings of investment in petroleum development project have a lot of weaknesses, which ignore the real options value of such investment and underestimate the true value, then in turn inevitably lead to wrong decisions.This paper discusses the application of real options pricing theory in petroleum development project. We analyze the characters of real options in the petroleum development project, the reason and mechanism of applying the real options method in the economic evaluation of the project. Because the result which we gets from the geometry brown motion has a trend to only one direction, we propose exponential O-U model to foresee petroleum price. Then we bring in the binomial tree option pricing method to calculate the value of real options for getting a more precise result.This paper mainly consists of the following work. In chapter 1, we introduce the background and significance. In chapter 2, we give some properties of exponential O-U process, which focus on the option pricing theory based on this process and will be used in chapter 4. In chapter 3, we give a brief introduction of real options. Through comparing the traditional methods with real options method when evaluating the value of petroleum development project, we get a result that real options method is better. In chapter 4, we discuss the option pricing theory of real options, which is the key of this paper. We analyze the option pricing method based on the exponential O-U process and binomial tree option pricing method. In chapter 5, we conclude that exponential O-U process gets a more precise petroleum price. Then we use the option pricing formula which is based on the exponential O-U process and binomial tree option pricing method to calculate the Value of deferring option. It shows that the petroleum development project will be underestimated if ignores the value of real options.