Petroleum exploration, development and production investments
involved a sequence of decisions over time as events unfold and learning occurs. These types of problems are sometimes
referred to as “real options”, “value-of-flexibility”, “market based valuations”,
or “dynamic or contingent decision problems.”
In many upstream oil and gas project settings, the firm is subject to
irreversible investments with widespread uncertainty and there may be a degree
of flexibility that allows managers to make changes to the project during its
life. This project flexibility is ignored in classical discounted cash flow (DCF) analysis and can significantly increase the value of
the project by taking into account the value of being able to alter a project
in response to unexpected market or technical developments. This course focuses
on using decision analysis, combined with modern insights from the financial
market, to address these problems. It is intended for those who are familiar
with the basics of decision analysis. Microsoft Excel and DPL will be used for
examples and exercises.
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Financial
options and real options
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Structure
dynamic decision problems
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Probabilistic
(stochastic) processes including geometric Brownian motion and mean reverting
models
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Modeling and valuing flexibility
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Model
assumptions
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Determining
volatility
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Market
uncertainty and private risks
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Correlated
uncertainties
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Applications