Paper
Valuation of a Typical Nigerian Crude Oil Reserve Using Real Option Analysis
- Authors:
- FALODE Olugbenga Adebanjo; OSHINIBOSI Yetunde Aderonke
- Abstract
- Real options analysis is a valuable tool in asset valuation; however, its application in evaluating oil and gas reserves is yet to be widely accepted, though many investigators have presented its potential advantages. This paper demonstrates the applicability and importance of real options analysis in the valuation of a typical Nigerian crude oil reserve. The cost data utilized represent real data for a typical Nigerian oil field. An improved version of the Black and Scholes (BS) model was developed by eliminating the assumption of a constant volatility. Crude oil price data from 1987 to 2012 were analysed with the volatilities of the return on crude oil price computed, and a time series model was developed which replicates this pattern of volatility. This was achieved by the use of a GARCH (General Autoregressive Conditional Heteroskedacity) model. The project was evaluated using the traditional NPV valuation method, the original BS model and the BS model with non-constant volatility. The results obtained using these methods were then compared. The real options valuation method provided the most accurate and reliable estimate of crude oil reserves using the BS model, which incorporates option values for various levels of volatility.
- Keywords
- Real Options; Valuation; Volatility; Net Present Value; Uncertainty; Crude Oil Reserves
- StartPage
- 20
- EndPage
- 31
- Doi
- 10.5963/IJEME0501003