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Optimal Investment Timing and Scale Choice of Overseas Oil Projects: A Real Option Approach

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  • Jia-Yue Huang

    (Center for Energy and Environmental Policy Research, Beijing Institute of Technology, Beijing 100081, China
    School of Management and Economics, Beijing Institute of Technology, Beijing 100081, China
    Beijing Key Lab of Energy Economics and Environmental Management, Beijing 100081, China
    Sustainable Development Research Institute for Economy and Society of Beijing, Beijing 100081, China)

  • Yun-Fei Cao

    (Center for Energy and Environmental Policy Research, Beijing Institute of Technology, Beijing 100081, China
    School of Management and Economics, Beijing Institute of Technology, Beijing 100081, China
    Beijing Key Lab of Energy Economics and Environmental Management, Beijing 100081, China
    Sustainable Development Research Institute for Economy and Society of Beijing, Beijing 100081, China)

  • Hui-Ling Zhou

    (Center for Energy and Environmental Policy Research, Beijing Institute of Technology, Beijing 100081, China
    School of Management and Economics, Beijing Institute of Technology, Beijing 100081, China
    Beijing Key Lab of Energy Economics and Environmental Management, Beijing 100081, China
    Sustainable Development Research Institute for Economy and Society of Beijing, Beijing 100081, China)

  • Hong Cao

    (Center for Energy and Environmental Policy Research, Beijing Institute of Technology, Beijing 100081, China
    School of Finance, Capital University of Economics & Business, Beijing 100070, China)

  • Bao-Jun Tang

    (Center for Energy and Environmental Policy Research, Beijing Institute of Technology, Beijing 100081, China
    School of Management and Economics, Beijing Institute of Technology, Beijing 100081, China
    Beijing Key Lab of Energy Economics and Environmental Management, Beijing 100081, China
    Sustainable Development Research Institute for Economy and Society of Beijing, Beijing 100081, China)

  • Nan Wang

    (School of Business, Beijing Technology and Business University, Beijing 100037, China)

Abstract

This article presents a real option model for helping investors to determine the optimal investment timing and scale of overseas oil projects. The model is suitable for the highly uncertain environments in which many oil companies operate, where they have to suspend upstream investment, stop new oilfield construction, and wait for proper oil prices in order to avoid losses. Considering the uncertainty of oil prices and exchange rates, the results of analytical solutions presented in this paper show the critical oil price that can be seen as the investment threshold for triggering oilfield development as well as the optimal recoverable factor for every oil price level to indicate the optimal investment scale. Results of the case project show the critical oil price, which is 82.32 US dollar per barrel, and the selection of optimal investment scale. The article also demonstrates the impact of investment scale on investment timing in overseas oil projects. The policy implication from the case project is that investment decisions are finitely impacted by geological conditions. Besides, the existence of tax holiday directly contributes to a lower investment threshold. In addition, reducing unit operation cost can obviously enlarge optimal investment scale and initiate oil projects in a relatively low level of investment threshold.

Suggested Citation

  • Jia-Yue Huang & Yun-Fei Cao & Hui-Ling Zhou & Hong Cao & Bao-Jun Tang & Nan Wang, 2018. "Optimal Investment Timing and Scale Choice of Overseas Oil Projects: A Real Option Approach," Energies, MDPI, vol. 11(11), pages 1-22, October.
    • Handle: RePEc:gam:jeners:v:11:y:2018:i:11:p:2954-:d:179032
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    3. Liya R. Artemkina & Natalya Y. Sopilko & Olga Y. Myasnikova & Irina U. Eremina & Nataliya V. Bondarchuk & Sergey V. Shamsheev, 2019. "The Model of Upstream Investment Portfolio in the Mature Regions," International Journal of Energy Economics and Policy, Econjournals, vol. 9(4), pages 173-180.

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