Study On The Application Of Real Options In Mining Project Investment Decision

The development and utilization of Shale gas is closely related to the futureenergy structure of China, and it will even bring an energy revolution. Investing inshale gas project is a high-risk and high return investment choice for its uncertainty.However, the cash flow and traditional investment decision analysis method are notsensitive enough to this kind of uncertainty. Conversely, real options method can makeflexible managements and adjustments about the investment risk and value with theconsideration of uncertainty. Therefore, we can apply real options method into thestudy of shale gas investment to find out the features of it, the theories and methods ofshale gas investment in terms of its concept. In this way, it becomes possible todecrease the risk as well as providing basis for decision-making in shale gasinvestment. Obviously, the adaption of real options method in shale gas investment isof great importance for its sustainable development.In recent years, the real options theory began to be widely used in the field ofproject valuation, which provides a new thought for investment in shale gas project.This article introduces the investment, decisions and real options method in shale gasproject. Meanwhile, this article also has compared the differences between traditionalmethod and real options method in decision analysis of investment projects. Bycontrasting the real options method and financial options, the essay finishes afeasibility and necessity analysis about the application of real options method in shalegas project, and built its process in practical use. Actually, models differ from eachspecific stage, that means, we can get application principles by analyzing real options’features. There are three methods in shale gas exploration. First one is for discovery,using the expansion option decision model. Second one is for timing choosing, basedon binomial option pricing method. The third one is for construction stopped upoptions for investment decisions.This article shows a full analysis on real options in shale gas investment, including qualitative analysis and quantitative analysis. The former focuses on theillustration of practical process and models, in contrast, the latter focuses on the NPVcalculation and valuation. In the end, the article elaborates the basic theories for theapplication of real options in shale gas investment.