The Economics of Undeveloped Reserve in Indonesia in the Current Uncertain Oil Price (2nd Asian Conference of the International Association for Energy Economics (IAEE), Perth – Australia, Nov 2008)

November 12, 2008 • Tell FriendsPrinter Friendly

– A case study of applying Least Squares Monte Carlo Method –


Indonesia has many potential undeveloped reserves and currently still depends on petroleum resources to support its economy. However, the economic criteria for investment decision making are still based on the traditional Discounted Cash Flow (DCF) that ignored the oil price volatility.

With the ability to value the uncertainty in the market (in this case is the oil price volatility) and the flexibility management to respond it, Real Option Valuation (ROV) is considered as the appropriate technique to value undeveloped reserve. The need for the ROV approach is essential for stimulating growth of oil and gas development in Indonesia.

After introduced in 2001 by Longstaff and Schwartz, the Least Squares Monte Carlo (LSM) Method had been extensively applied in natural resource industry (Sabour et al. 2006, Laughton et al. 2006). Since natural resource industry has multiple source of uncertainty from below and above ground factor, this methodology is suitable to be applied in this industry.

This paper examines the application of ROV to value undeveloped reserve in Indonesia using LSM Method. This paper will use a case study of PSC block and compare the result between forecast value from both methodologies (DCF and ROV).

This paper concludes that ROV can be applied to the Indonesian PSC regime. ROV is more likely to reveal a true picture of the worth of petroleum assets in Indonesia than any other currently available technique. As such, it has the potential to form a proper basis for investment decision making, as a result of which production of the undeveloped reserves in Indonesia can be stimulated

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