Based On Real Option Theory In The Oil And Gas Exploration And Development Project Investment Decision-making Research

The investment decision-making of oil-gas exploration and development throughout the course from exploration to production, and there are a lot of uncertain factors. The traditional tools for investment decision-making are fear of uncertainty and they underestimated the value of project. Real option proves that the higher uncertainty is, the higher project value is. Real option is not only a technical tool for the flexibility of investment similar to financial option, but also a kind of thinking, and it greatly promotes the scientific process of the investment decision-making in the project management. The real option revises the hypothesis in the traditional tools, which believes that the investment of oil-gas exploration and development is reversible and rigid. It attaches importance to the phased appraise at every stage of the investment. The way of adopting risk-free interest is objective and accurate. Real option considers not only the inherent value of the project based on traditional cash flow, but also the strategic value that benefit the corporation in the future and the flexibility value, thus it can assess the total value of the project perfectly and rationally.Based on the thoughts above, we study the valuation methods of real options that are suitable to oil and gas exploration projects. We introduce the basic theories, pricing methods compound real options and its compatibility with oil and gas exploration projects. Next, we introduce the three steps of exploration, development and production in the process of oil and gas exploration projects. Based on these studies, we analyze the comprehensive characteristics. Since the existence of these characteristics, traditional methods like discounted cash flows analysis are no longer suitable to be used. Based on the aforementioned analysis, we make an inquiry into the usage of compound real option theory in to evaluation of oil and gas exploration projects. Since there are three steps during the project, it is complicated to evaluate the value of the real option. We find a pricing model to calculate the price of this particular option in literature. Using numerical analysis, we explore the main influencing variables that influence the value of the option. These factors are dividend-like yield, risk-free rate and volatility. The major finding is that these factors change the value of compound real option in a way that is different from that of classical financial option theories. For example, option value is no longer an increasing function of risk-free rate and volatility, and we also find that the investment mode also has great influence on the value of the real option. These findings will be of great use in the decision making of oil and gas exploration projects.