The net present value of an E&P-project is still the mostrnimportant investment criteria in oil field acquisitions. Besidesrnthe discount rate assumption and the estimation of the strategicrnvalue of an E&P-project, the oil price assumption is the mostrnimportant input parameter in E&P-project calculations. Evenrnsmall variations in the oil price assumption can have largerninfluence on the resulting project value. Therefore, for arnrealistic E&P-project valuation it is critical to usernsophisticated methods for the estimation of the future oil price.rnIn the past, it was common practice to simply assume arnfixed value for the long-term oil price (flat price); others usernforward curves as a forecast (floating price). In probabilisticrncalculations (e.g. in Monte Carlo simulation) and in using thernoption pricing theory for valuing real options, stochasticrnprocesses are modeled. Here, the oil price is predominantlyrnconsidered as to follow a Geometric Brownian Motion or arntype of a Mean Reverting Process.rnThis paper presents an improved concept for modelingrnshort- and long-term oil prices. The method is based on thernpremise that forward and future prices are the markets bestrnguess of future oil prices. The future or forward curve isrnutilized as the expected value curve for the Mean RevertingrnProcess. Thus, the oil price is modeled in a way that makes thernresulting oil price assumption suitable for incorporating it inrntraditional net present value calculation as well as inrnsophisticated real option valuations. On the one hand for therndiscounted cash flow method it is critical to use reasonablernshort- and long-term values for the oil price, on the other handrnfor real options valuation it is necessary to model the oil pricernstochastically. The presented improved method fulfils bothrnbasic requirements and is therefore a strong improvement torncommon E&P-project valuations.
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