SPE Economics & Management
Volume 4,
Number 3,
July 2012,
pp. 158-170
Summary
We discuss the two-factor oil-price model in valuation and analysis of
flexible investment decisions. In particular, we will discuss the real options
formulation of a typical oilfield-abandonment problem and will apply the
least-squares Monte Carlo (LSM) simulation approach for calculation of project
value. In this framework, the two-factor oil-price model will go a long way in
the analysis of decisions and value creation. We also propose an implied method
for estimation of parameters and state variables of the two-factor price
process. The method is based on implied volatility of option on futures, the
shape of the forward curve, and the implicit relationship between model
parameters.
© 2012. Society of Petroleum Engineers
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History
- Original manuscript received:
28 October 2010
- Revised manuscript received:
18 March 2012
- Manuscript approved:
1 May 2012
- Version of record:
13 July 2012
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