Oil Field Valuation – An Real Option Based Analysis

Mean Reversion Parameter

As can be seen from the above analysis, the mean reversion parameter is a very important factor in the determination of the oil field value. Here the impact of variation in the mean reversion parameter on the value of the oil field is analyzed. Table 4.3 presents the impact of the variation of critical spot price.

No	Case	Mean Reversion Parameter	Critical Spot Price
1	Base Case	0.5	$17.6 /barrel
2	High Mean Reversion Parameter	0.1	$15.6 /barrel
3	Low Mean Reversion Parameter	0.01	$18.0 /barrel

Table 4.3 – Development Costs and Critical Spot Price

Fig 4.7a and Fig 4.7b depict the variation of the oil field value with time to expiration of development option for various levels of spot price for the high and low values of the mean reversion parameter. As can be seen from these figures and Fig 4.5, for spot values close to Ŝ, the oil field values given by all three models are fairly close. But in case high spot prices, low mean reversion provides significantly higher returns and high reversion provides lesser returns compared to the base case. The opposite effect can be seen for spot prices that are lesser than Ŝ. This is in line with the expectations as lower the mean reversion parameter, the more the likelihood of the oil price staying close to the spot price at a particular point of time and consequently be dependent on that spot price.

Fig 4.7 b – Oil field value with high mean reversion

Fig 4.7 b – Oil field value with low mean reversion

In this section, an attempt is made to value two actual oil fields using the techniques developed in the previous sections. The two oil fields chosen for analysis this section are

1. 
   Sakhalin 1 oilfield in Russia
   
2. 
   Atlantis oilfield in USA
   

The parameters used for valuing the Sakhalin oil field are given in Appendix I – A. In areas where the values pertaining to the oil field were not available, the base case estimates have been used as a proxy.

Fig 5.1 – Variation of Sakhalin-I Oil Field Value with time left for exercise of Development Option

As can be seen from Fig 5.1, the value of Sakhalin – I oil field is not very much dependent on either the spot price of oil or the amount of time left for development option. The reason for this is that the large amount of reserves present in this oil field will ensure that it is operational for around 40 years or more. Therefore any effect of the timing option and value of spot price is diminished. This is also responsible for the low value of critical spot price for the oil field at $10.4 /barrel. (This should be seen against a S_ci of $17.6 /barrel for base case where the value of Ŝ is $20 /barrel compared to $30 /barrel used in the case analysis)

Case 2 – Atlantis

The parameters used for valuing the Atlantis oil field are given in Appendix II – A. In areas where the values pertaining to the oil field were not available, the base case estimates have been used as a proxy.

Fig 5.2 – Variation of Atlantis Oil Field Value with time left for exercise of Development Option