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On the Use of Modern Asset Pricing for Comparing Alternative Royalty Systems for Petroleum Development Projects

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  • Paul G. Bradley

Abstract

This paper is the second in a series that describes how Modern Asset Pricing (MAP) may be used for project evaluation in the upstream petroleum industry. It has two goals. First, it demonstrates how MAP can be applied to the general class of projects where the project manager does not have any future flexibility that must be analysed. Second, the usefulness of MAP in fiscal system analysis is illustrated by the evaluation of a series of oil-field development projects under a variety of fiscal regimes. In situations where different fiscal systems have the same effect on a discounted cash flow (DCF) basis, the value of afield to a developer may appear quite different when analysed using MAP. MAP takes into account the differing risk characteristics of the cash-flow streams of the developer and the government or resource owner, and provides us with an added dimension of information: comparisons of how different fiscal systems distribute risk among the parties involved in the project.

Suggested Citation

  • Paul G. Bradley, 1998. "On the Use of Modern Asset Pricing for Comparing Alternative Royalty Systems for Petroleum Development Projects," The Energy Journal, , vol. 19(1), pages 47-81, January.
    • Handle: RePEc:sae:enejou:v:19:y:1998:i:1:p:47-81
    DOI: 10.5547/ISSN0195-6574-EJ-Vol19-No1-3
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    1. repec:aen:journl:1998v19-01-a02 is not listed on IDEAS
    2. Hayne E. Leland, 1978. "Optimal Risk Sharing and the Leasing of Natural Resources, with Application to Oil and Gas Leasing on the OCS," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 92(3), pages 413-437.
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