Oil Field Valuation – An Real Option Based Analysis

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Appendix I – B
Appendix I – C

Appendix II – A: Parameters used in the valuation of Atlantis

No	Parameter Name	Value	No	Parameter Name	Value
1	Long term average unit price of oil	$30 / barrel	11	Unit Production cost in Stage II	$5 / barrel
2	Risk free rate of interest	6%	12	Annual Capital costs	$5.1 / barrel
3	Mean convenience yield of holding one unit	6%	13	Depreciation	$3 / barrel
4	Mean reversion parameter	0.05	14	Royalty Rate	5%
5	Instantaneous volatility of returns of holding one unit of oil	8.42%	15	Corporate Tax Rate	35%
6	Remaining time till expiration of development option (Tⁱ)	5 years	16	Oil Price step size	$ 0.4
7	Remaining time till investment is completed in Stage II (T^d)	1 year	17	Time to expiration of development option - step size (ΔTⁱ )	0.033 year
8	Remaining reserves of oil	635,000,000 barrels	18	Oil production rate – step size (ΔQ)	50,000 barrels
9	PV of development investment in Stage II	$3,250,000,000	19	Time till investement is complete – step size (ΔT^d)	0.04 year
10	Annual Production Rate in Stage II	6.67% p.a.

Appendix I – B: Variation of Oil Field value for Atlantis in Stage II

Appendix I – C: Variation of Oil Field value for Atlantis in Stage III

References

Implementing a Real Option Model for valuing and Undeveloped Oil field, Gonzalo Cortazar and Eduardo S.Schwartz, 1997
http://www.sakhalin1.com/
'Sakhalin 1 and Sakhalin 2 Project’s 2006 Earnings', The Sakhalin Times, http://www.thesakhalintimes.com/index.php?action=news&id_catalog=11&id_news=1158
Sakhalin-1 Project, Russia, Oil and Gas, Energy Focus, www.energy-focus.com/issue1/pdfs/sakahlin.pdf
http://www.lngplants.com/Sakhalin_Pictures.html
http://www.subseaiq.com/(S(cvhtmz45rvl2hc55lburiyel))/Data/Project.aspx?pid=304
http://www.bp.com/genericarticle.do?categoryId=9004519&contentId=7008067
BHP BILLITON QUARTERLY REPORT ON EXPLORATION AND DEVELOPMENT ACTIVITIES, July 2006 – September 2006, NEWS RELEASE, 24 October 2006
BHP Billiton Ltd., Form 6-K, Securities and Exchange Commision, 2003, http://www.secinfo.com/dXxPe.21d.htm
Goldman Sachs, Global Energy Conference, Jan 2006
Uncertainty and the Price for Crude Oil Reserves, Timothy J. Considine and Donald F. Larson, 1996
Oil Market Developments and Issues, Mark Allen, IMF, 2005

1 The Model has been described in a research paper by Gonzalo Cortazar and Eduardo S.Schwartz - “Implementing a Real Option Model for Valuing an Undeveloped Oil Field”, 1997

CCS Final Report Oil Field Valuation – A Real Option Analysis

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