Two-factor oil-price model and real option valuation: an example of oilfield abandonment

Babak Jafarizadeh, Reidar Bratvold

Research output: Contribution to journalArticle

16 Citations (Scopus)

Abstract

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.
Original languageEnglish
Pages (from-to)158-170
Number of pages13
JournalSPE Economics and Management
Volume4
Issue number3
DOIs
Publication statusPublished - Jul 2012

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