Volatility and an underlying deterioration
in commodity prices, including oil and gas prices, have severely
undermined confidence and the viability of Exploration and Production
projects. In turn, this has amplified the need to undertake a thorough
investigation into risks and uncertainties as part of the financial
modeling and decision-making in oil Exploration and Production projects.
To address this requirement– for increased rigor of decision-making and
beyond the current practice of the mere deployment of a Discounted Cash
Flow model, a new model integrating Real Options and Monte Carlo
simulation of a project’s valuation is presented. The new model is
mainly to be applied to explain the risks and uncertainty of the
projects. More specifically, a case study of an oil Exploration and
Production project is used to illustrate the effectiveness and validity
of the proposed new model.