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Oil and Gas Exploration Valuation and the Value of Waiting

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  • Babak Jafarizadeh
  • Reidar Brumer Bratvold

Abstract

The timing flexibility of investments in oil and gas assets can potentially add value. In this article, we examine the value of waiting in exploration projects and propose a real option–based valuation method using least-squares Monte Carlo simulation. We show that the dynamics of the oil and gas prices have a large impact on the value of the option to wait, especially for projects with long lead times and durations. The uncertainty in the forward price curve is modeled using a two-factor stochastic price process. The article also presents the valuation method in the form of MATLAB functions and routines that can be used as an efficient test and analysis platform using the industry-standard input formats.

Suggested Citation

  • Babak Jafarizadeh & Reidar Brumer Bratvold, 2015. "Oil and Gas Exploration Valuation and the Value of Waiting," The Engineering Economist, Taylor & Francis Journals, vol. 60(4), pages 245-262, October.
    • Handle: RePEc:taf:uteexx:v:60:y:2015:i:4:p:245-262
    DOI: 10.1080/0013791X.2015.1045647
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    Cited by:

    1. Fedorov, Semyon & Hagspiel, Verena & Rogstad, Richard W.H. & Haseldonckx, Sophie & Haugsgjerd, Johannes H. & Rønning, Anders, 2024. "Evaluation of tieback developments for marginal oil fields with timing flexibility," Energy Economics, Elsevier, vol. 131(C).
    2. 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.
    3. Kaufmann, Robert K., 2023. "Energy price volatility affects decisions to purchase energy using capital: Motor vehicles," Energy Economics, Elsevier, vol. 126(C).
    4. Jonathan Doh & Pawan Budhwar & Geoffrey Wood, 2021. "Long-term energy transitions and international business: Concepts, theory, methods, and a research agenda," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 52(5), pages 951-970, July.
    5. Babak Jafarizadeh & Reidar B. Bratvold, 2019. "Exploration economics: taking opportunities and the risk of double-counting risk," Mineral Economics, Springer;Raw Materials Group (RMG);Luleå University of Technology, vol. 32(3), pages 323-335, November.

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