SPE Economics & Management
Volume 4, Number 4, October 2012, pp. 204-214

SPE-163080-PA

Method for Consistent Valuation of Assets With Multiple Sources of Uncertainty

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DOI  More information 10.2118/163080-PA http://dx.doi.org/10.2118/163080-PA

Citation

  • Wilkinson, D., Bailey, W.J., and Couët, B. 2012. Method for Consistent Valuation of Assets With Multiple Sources of Uncertainty. SPE Econ & Mgmt  4 (4): 204-214. SPE-163080-PA. http://dx.doi.org/10.2118/163080-PA.

Summary

A simplified version of the Smith and Nau (1995) integrated solution scheme is applied to the valuation of an oilfield project possessing salvage options and both private and public uncertainties. It is shown that the computed valuation is consistent with the definition of the real option price as the maximum value that could be obtained, without market risk, from an ensemble of projects that sample the private uncertainty. The attainment of this value requires an optimal decision strategy and a hedging strategy, both of which are obtained as a byproduct of the valuation. The interpretation of the obtained value is validated by forward simulation over an ensemble of projects, by use of a fully reproducible worked example.

© 2012. Society of Petroleum Engineers

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History

  • Original manuscript received: 24 May 2011
  • Revised manuscript received: 7 August 2012
  • Manuscript approved: 1 September 2012
  • Published online: 1 November 2012
  • Version of record: 1 November 2012