IDEAS home Printed from https://ideas.repec.org/a/sae/enejou/v14y1993i2p1-26.html

Petroleum Property Valuation: A Binomial Lattice Implementation of Option Pricing Theory

Author

Listed:
  • Eric Pickles
  • James L. Smith

Abstract

We take a simple tutorial approach to explain how option valuation can be applied in practice to the petroleum industry. We 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 we derive the value of discovered, undeveloped reserves projected to result from offshore licensing in the United Kingdom, and we 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. We 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.

Suggested Citation

  • Eric Pickles & James L. Smith, 1993. "Petroleum Property Valuation: A Binomial Lattice Implementation of Option Pricing Theory," The Energy Journal, , vol. 14(2), pages 1-26, April.
    • Handle: RePEc:sae:enejou:v:14:y:1993:i:2:p:1-26
    DOI: 10.5547/ISSN0195-6574-EJ-Vol14-No2-1
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.5547/ISSN0195-6574-EJ-Vol14-No2-1
    Download Restriction: no
    File URL: https://libkey.io/10.5547/ISSN0195-6574-EJ-Vol14-No2-1?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dias, Marco Antonio Guimarães & Borges, Roberto Evelim Penha, 2025. "Valuing oil reserve volumes under price uncertainty," Journal of Economics and Business, Elsevier, vol. 137(C).

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:enejou:v:14:y:1993:i:2:p:1-26. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.