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• W4243936364 abstract "A Critical Comparison of Real Option Valuation Methods: Assumptions, Applicability, Mechanics, and Recommendations Reidar Brumer Bratvold; Reidar Brumer Bratvold University of Stavanger Search for other works by this author on: This Site Google Scholar Stephen Hope Begg; Stephen Hope Begg U. of Adelaide Search for other works by this author on: This Site Google Scholar David Laughton; David Laughton David Laughton Consulting Ltd. Search for other works by this author on: This Site Google Scholar Adam Borison; Adam Borison Stratelytics Search for other works by this author on: This Site Google Scholar Truett Earl Enloe Truett Earl Enloe Unocal Corporation Search for other works by this author on: This Site Google Scholar Paper presented at the SPE Annual Technical Conference and Exhibition, Dallas, Texas, October 2005. Paper Number: SPE-97011-MS https://doi.org/10.2118/97011-MS Published: October 09 2005 Cite View This Citation Add to Citation Manager Share Icon Share Twitter LinkedIn Get Permissions Search Site Citation Bratvold, Reidar Brumer, Begg, Stephen Hope, Laughton, David, Borison, Adam, and Truett Earl Enloe. A Critical Comparison of Real Option Valuation Methods: Assumptions, Applicability, Mechanics, and Recommendations. Paper presented at the SPE Annual Technical Conference and Exhibition, Dallas, Texas, October 2005. doi: https://doi.org/10.2118/97011-MS Download citation file: Ris (Zotero) Reference Manager EasyBib Bookends Mendeley Papers EndNote RefWorks BibTex Search Dropdown Menu toolbar search search input Search input auto suggest filter your search All ContentAll ProceedingsSociety of Petroleum Engineers (SPE)SPE Annual Technical Conference and Exhibition Search Advanced Search AbstractMore than thirty years after the debut of the famous Black-Scholes option pricing formula, and more that twenty five years after Stewart Myers coined the term, real option valuation has yet to catch on at most companies in the upstream petroleum industry as part of the asset decision-making process.While there is a great deal of agreement about the appeal of the underlying ideas, a variety of contradictory implementations, many of which are ill founded or poorly constructed, have been suggested for putting real options into practice. The resulting confusion has made an already difficult problem of diffusion of innovation even more difficult.In this paper, we build on the work done at the SPE workshop on valuation held in Banff in 2003 to create a detailed taxonomy of the various approaches to real options valuation that have been proposed, and use this taxonomy to compare the different methods.The comparison uses, as an example, an offshore production drilling decision that is realistic on a business level both in structure and data.IntroductionThe upstream petroleum industry has had for some time a focus on improving its asset selection, design and management process.One aspect of this has been continuing efforts to understand better the implications of uncertainty for decision-making and to develop better methods of incorporating the effects of uncertainty into the metrics used to evaluate different decision alternatives.The managers of a public corporation have a fiduciary responsibility to maximise the value of its assets, as determined by their price in the financial markets of relevance to its investors.Therefore the primary metric used to judge the quality of a decision is the asset value that the decision generates.There are a wide variety of approaches that attempt to determine which decision in any given commercial situation will maximise asset value.Practice in the upstream petroleum industry reflects this diversity and has evolved over time, as organisations have sought processes not only to make better choices from among alternatives for the design and management of real assets, but also to generate a better range of alternatives to consider.An important part of many of these approaches is the estimation of asset value using discounted cash-flow (DCF) methods.There has also been exploration of other approaches to estimating asset value, some of which are motivated by developments in financial markets over the last 30 years and known in the industry as real option valuation (ROV) methods.Unfortunately, there has been some confusion over the conceptual underpinnings of the various approaches to value estimation, the relationships among them and the implications of this for standards of best practice.Because of this, a group of upstream petroleum industry managers and consultants decided to use the technical forum and workshop process of the Society of Petroleum Engineers (SPE) to organise some pre-competitive investigations of these issues.Technical fora were held in 2000 and 2002.Participants in these fora requested a workshop on topics in advanced economic analysis, including probabilistic DCF analysis, decision tree analysis, and real options analysis.In response to this, the SPE organised a workshop on The Theory and Art of Asset Valuation:Building a Case of Change - Applying to the Oil and Gas Industry What Finance has Learned, in September 2003 in Banff, Canada. Some of the results of that workshop are described in Laughton (2005).Our work should be read within the context of that paper.One of the key outputs of the workshop was a taxonomy of valuation methods that has come to be known as the Banff taxonomy (Figure 1). It was designed to support discussions to clarify some of the confusion about valuation methods that has plagued the industry over the last couple of decades.Workshop participants and others since have found it to be very useful for this purpose. Keywords: production uncertainty, risk management, laughton, scenario tree, flexibility, simulation, machine learning, artificial intelligence, valuation, price forecast Subjects: Asset and Portfolio Management, Risk Management and Decision-Making, Decision-making processes This content is only available via PDF. 2005. Society of Petroleum Engineers You can access this article if you purchase or spend a download." @default.
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• W4243936364 title " A Critical Comparison of Real Option Valuation Methods: Assumptions, Applicability, Mechanics, and Recommendations " @default.
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