Advance Petroleum Economics for Making Decision in the High Volatile of Oil Price (33rd IPA Conference, May 2009)

May 12, 2009 • Tell FriendsPrinter Friendly

-An Application of Dynamic DCF and Real Options Approach in the PSC Regime-


Petroleum valuation professionals have been actively investigating how to improve Discounted Cash Flow (DCF) valuation methods by better representing petroleum industry complexities in their cash flow models.

The focus of Dynamic DCF and Real Options (RO) methods is to asses the impact of the high uncertainty of oil price on the project value and risk. The difference in their approach to adjusting project cash flow for risk gives the different result of the project value.

This paper examines the valuation of oil field in the Indonesian PSC regime. Monte Carlo simulation is used to characterize the different exposures of the contractor and the government to the risky cash flow streams that they receive from the project. The results highlight that Monte Carlo simulation paired with the RO method is able to account appropriately for the differing exposures.

This paper makes the conclusion that RO is more likely to reveal a true picture of the worth of undeveloped reserves in Indonesia than other currently available technique. As such, it has the potential to form a proper basis for the negotiation of contract terms between the contractor and the Government of Indonesia, as a result of which development of the undeveloped reserves in Indonesia can be stimulated.

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