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Valuing Flexibility in Offshore Petroleum Projects

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  • Morten Lund

Abstract

The average size of discovered petroleum reserves on the Norwegian continental shelf has declined steadily over the last years. As a consequence, the fields have become economically more marginal, and new and flexible development strategies are required. This paper describes a stochastic dynamic programming model for project evaluation under uncertainty, where emphasis is put on flexibility and its value. Both market risk and reservoir uncertainty are handled by the model, as well as different flexibility types. The complexity of the problem is a challenge and calls for simple descriptions of the main variables in order to obtain a manageable model size. Results from a case study reveal significant value of flexibility, and clearly illustrate the shortcoming of today's common evaluation methods. Particularly capacity flexibility should not be neglected in future development projects where uncertainty surrounding the reservoir properties is substantial. Copyright Kluwer Academic Publishers 2000

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  • Morten Lund, 2000. "Valuing Flexibility in Offshore Petroleum Projects," Annals of Operations Research, Springer, vol. 99(1), pages 325-349, December.
    • Handle: RePEc:spr:annopr:v:99:y:2000:i:1:p:325-349:10.1023/a:1019284119505
    DOI: 10.1023/A:1019284119505
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    Cited by:

    1. M’hamed Gaïgi & Stéphane Goutte & Idris Kharroubi & Thomas Lim, 2021. "Optimal risk management problem of natural resources: application to oil drilling," Annals of Operations Research, Springer, vol. 297(1), pages 147-166, February.
    2. Aleksandrov, Nikolay & Espinoza, Raphael & Gyurkó, Lajos, 2013. "Optimal oil production and the world supply of oil," Journal of Economic Dynamics and Control, Elsevier, vol. 37(7), pages 1248-1263.
    3. Tian, Lixin & Pan, Jianglai & Du, Ruijin & Li, Wenchao & Zhen, Zaili & Qibing, Gao, 2017. "The valuation of photovoltaic power generation under carbon market linkage based on real options," Applied Energy, Elsevier, vol. 201(C), pages 354-362.
    4. Okaro, Ikenna Anthony & Tao, Longbin, 2016. "Reliability analysis and optimisation of subsea compression system facing operational covariate stresses," Reliability Engineering and System Safety, Elsevier, vol. 156(C), pages 159-174.
    5. Krishnan, Trichy V. & Feng, Shanfei & Beebe, Tony, 2011. "Modeling the demand and supply in a new B2B-upstream market using a knowledge updating process," International Journal of Forecasting, Elsevier, vol. 27(4), pages 1160-1177, October.
    6. Ahmed Al sharif & Ruwen Qin, 2015. "Double-sided price adjustment flexibility with a preemptive right to exercise," Annals of Operations Research, Springer, vol. 226(1), pages 29-50, March.
    7. Ilyes Abid & Stéphane Goutte & Farid Mkaouar & Khaled Guesmi, 2019. "Optimal strategy between extraction and storage of crude oil," Annals of Operations Research, Springer, vol. 281(1), pages 3-26, October.
    8. Abdul-Salam, Yakubu & Kemp, Alex & Phimister, Euan, 2022. "Energy transition in the UKCS – Modelling the effects of carbon emission charges on upstream petroleum operations," Energy Economics, Elsevier, vol. 108(C).
    9. Mr. Nikolay Aleksandrov & Mr. lajos Gyurko & Mr. Raphael A Espinoza, 2012. "Optimal Oil Production and the World Supply of Oil," IMF Working Papers 2012/294, International Monetary Fund.
    10. Nadarajah, Selvaprabu & Secomandi, Nicola, 2023. "A review of the operations literature on real options in energy," European Journal of Operational Research, Elsevier, vol. 309(2), pages 469-487.
    11. Lei, Guowen & Hagspiel, Verena & Stanko, Milan, 2023. "Price stress testing in offshore oil field development planning," Energy, Elsevier, vol. 263(PD).
    12. Shaton, Katerina, 2015. "Value of Flexibility in Gas Pipeline Investments," Chapters from the Proceedings of the Hamburg International Conference of Logistics (HICL), in: Kersten, Wolfgang & Blecker, Thorsten & Ringle, Christian M. (ed.), Innovations and Strategies for Logistics and Supply Chains: Technologies, Business Models and Risk Management. Proceedings of the Hamburg Internationa, volume 20, pages 333-357, Hamburg University of Technology (TUHH), Institute of Business Logistics and General Management.

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