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The Management of Flexibility in the Upstream Petroleum Industry

David Laughton

Year: 1998
Volume: Volume19
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol19-No1-4
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Abstract:
This paper is the third in a series that describes how Modern Asset Pricing (MAP) may be used for project evaluation in the upstream petroleum industry. It demonstrates how MAP can be applied to projects where policies for the management of future flexibility must be considered within the context of the valuation. We illustrate this use of MAP by looking specifically at flexibility in the timing of the exploration, delineation, and development of an oil prospect, and the timing of the abandonment of the subsequent developed field. We use examples to show how the value and management of flexibility depends on the amount of oil price and reserve size uncertainty. We find that prospect value increases with both types of uncertainty. We also find that all actions, from exploration to abandonment, occur later with greater oil price uncertainty. Conversely, we find that exploration and delineation occur sooner with greater reserve uncertainty. The reasons for these results are given.



The Potential for Use of Modern Asset Pricing Methods for Upstream Petroleum Project Evaluation: Concluding Remarks

David G. Laughton

Year: 1998
Volume: Volume19
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol19-No1-6
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Abstract:
MAP methods are continually being refined and expanded. In these concluding remarks I would like to touch on some of those developments, and then briefly to mention some steps that might be taken by an organisation that wants to explore this field further.





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