Explore Real Options

we delivered  a topic:

Utilizing oil and gas economic modeling framework for evaluating upstream oil and gas assets to enhance accuracy in decision-making in PSCs, joint operations or mergers

For detail progamme and registration of this event, please see their website.

MGEI-IAGI is proudly arranging this luncheon talk that hopefully will enhance the valuation knowledge with the various techniques from conventional to modern methods for improved investment decision making.

This event will launch a book ” A New Era of Project Economics and Investment Decision Making – From conventional DCF to modern RO method” that recently published this month, written by Nuzulul Haq.

For more information regarding this event, please contact:
IAGI Secretariat (attn. Bapak Sutar)
phone: 0811162476
fax: 021-83702848
email: iagisek@cbn.net.id

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

ABSTRACT

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.

ABSTRACT

Harga minyak yang tinggi hingga menembus $100/barrel tidak pernah diperkirakan sebelumnya. Hal ini kembali menyadarkan kita bahwa apapun mungkin terjadi meski menurut kita itu tidak mungkin beberapa tahun yang lalu.

Banyaknya proyek perminyakan yang terlambat untuk berproduksi karena belum disepakatinya kontrak perjanjian antara berbagai pihak yang terlibat dikarenakan hasil perhitungan keekonomian yang belum memuaskan, mengakibatkan proyek-proyek tersebut tidak mendapatkan keuntungan atas tingginya harga minyak yang terjadi saat ini.

Fakta bahwa industri perminyakan menghadapi ketidakpastian yang tinggi dimasa depan seperti harga minyak tentunya harus dipertimbangkan oleh para praktisi didalam melakukan studi keekonomian suatu proyek Migas.

Perhitungan keekonomian dengan menggunakan pendekatan statis menyebabkan banyak keputusan investasi pada waktu itu didasarkan pada asumsi harga yang sangat konservatif.dan tidak memperhitungkan adanya volatilitas harga minyak ke depan. Hal ini menjadi salah satu sebab lambatnya keputusan investasi pada waktu itu.

Dalam teori keputusan investasi, perbedaan antara perhitungan net present value (NPV) tradisional dan Real Options adalah “timing of investment” dimana pada NPV tradisional peluang investasi adalah sekarang atau tidak sama sekali (now or never). Sebagai contoh kita akan tunda investasi jika nilai NPV kecil atau negatif. Tapi kebanyakan investasi bukan “now or never, Dalam beberapa kasus, kriteria NPV yang kecil, tidak cukup dijadikan faktor untuk memutuskan agar proyek ini ditunda.
Dalam teori real options, penundaan investasi bukan merupakan keputusan yang efektif selama nilai proyek tersebut lebih tinggi dari nilai thresholdnya. Nilai threshold inilah yang dapat diperoleh dari metode real option dengan mempertimbangkan adanya volatilitas harga minyak.

Tujuan makalah ini adalah untuk melihat kemungkinan aplikasi teori real option dalam membantu keputusan investasi dalam proyek perminyakan di Indonesia

Makalah ini menghasilkan beberapa kesimpulan diantaranya Real Option dapat diaplikasikan dalam perhitungan keekonomian proyek perminyakan di Indonesia, serta nilai yang dihasilkan dari metode ini lebih memperlihatkan nilai yang sebenarnya dari proyek tersebut dibandingkan dengan menggunakan metode NPV tradisional.

ABSTRACT

When Government opens the tender for some new PSC blocks, the government expect contractor to invest immediately for exploration activity and develop soon after getting a confirmation of commercial reserve. By the end Government expect the maximize revenue from those tender blocks for the benefit of Indonesia

In term of investment decision, a different between traditional net present values (NPV) analysis and real options analysis is the timing of investment. NPV analysis suggest that if the investment opportunity is “now or never”, invest now of NPV is positive. But most investments are not “now or never”, and in these cases an NPV greater than zero is not sufficient for immediate investment, option pricing theory tells us that, immediate investment is not optimal unless well head prices are higher than threshold price.

The objective of this paper is to examine how Real Options Analysis can help both government and contractor in analyzing the potential undeveloped reserves.

This paper extends a model by Paddock, Siegel and Smith (1988) to value undeveloped reserve in Indonesian PSC regime

This paper concludes that ROV can be applied to the Indonesian PSC regime to value undeveloped reserve in Indonesia. ROV is more likely to reveal a true picture of the worth of exploration potential and the value of undeveloped reserves in Indonesia than any 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.

Abstract

The high costs and risks associated with many oil and gas exploration projects often cause companies to seek partners to share those costs and risks before embarking on major expenditure programs.

A previous study of farm out analysis for block X in Medco has been done using deterministic model (Kristiono, 2005). This further study was conducted to optimize farm-out analysis using probabilistic model. A risked economic evaluation of a two pay zone prospect i.e. Zone A and B in that block illustrates how probabilistic simulation modeling and deterministic valuation and risk analysis techniques combine to provide useful insight to economic evaluation of a farm out opportunity.

One of the significant advantages of probabilistic methods is their ability to quantify downside risk in more detail than deterministic calculations. Analysis of the negative values in the calculated EMV distributions from the probabilistic method can yield significant insight into the downside risk associated with a prospect.

This paper concluded that, there do appear to be farm-out terms that could be attractive to both parties i.e. Farminee pays between 60% and 70% of exploration well costs to earn a 50% working interest. However, If Medco is subject to capital constraints and under timer pressure to drill an obligation well it may accept farm-in terms with little or no promote to limit its financial exposure and down side risk.
Alternatively, the farminee may be prepared to accept less than optimal farm-in terms on this prospect in exchange for an interest in the upside potential of other possible prospects in the contract.

Abstract

Indonesia has many potential undeveloped reserves and currently still depends on petroleum resources to support its economy. In Indonesia case, the Discounted Cash Flow (DCF) is much more widely applied than

Real Option for valuation of the petroleum project. Generally, ROV was chosen to accommodate flexibility management in adapting and revising future decisions in response to changing circumstances. The ROV technique makes efficient use of market information and minimizes reliance on subjective and arbitrary data inputs, as observed in the illustrations in Paddock, Siegel and Smith (1988).

Two approaches can be used to value petroleum reserve using ROV i.e.:
- Internal approach that uses the output of DCF result.
- External approach that uses market data i.e. historical actual reserve transaction price.

ROV still requires the use of an existing DCF model when we want to value the petroleum project under our company. Since the field under our internal control, there will be much technical and financial information about the field, and we can use that information to make economics projection for that field.

However, if we want to value the petroleum project beyond our control for instance, in the acquisition program, external approach is required to see how market expects the value of the petroleum reserve at this moment. In this case, ROV can make efficient use of market information and minimizes reliance on subjective judgments and arbitrary assumptions provided by an analyst, as the illustrations in Paddock, Siegel and Smith (1998) demonstrates.

In internal approach, we identify the underlying asset as the net present value of developed petroleum reserves. The NPV exhibits a log normal probability distribution, so the volatility of the underlying asset is based on the logarithm of the future cash flows.

In external/market approach, the underlying asset is valued based on the historical actual reserve transaction data from Adelman and Watkins’ study in 2003. This paper tests for co-integration between the estimated oil reserve price and WTI spot price. The output of the Error Correction Model will be an input for ROV in term of underlying asset parameter.