Calculating the real option value of an exploration mineral rights lease using Monte Carlo simulation.

摘要

Option pricing theory has been applied in the literature to valuing real assets in which the right exists to delay an investment in an uncertain environment. One such example is the ownership of a petroleum exploration mineral rights lease. These leases have an option within an option structure. The owner of the lease has the right, but not the obligation to drill an exploratory well in search of previously unproven hydrocarbon reserves. The owner of the lease also has the right, but not the obligation, to install extraction assets and to recover any hydrocarbons discovered by the exploratory well. Correctly valuing an exploration mineral rights lease is critical since the acquisition of these leases is one of the most competitive activities in hydrocarbon exploration and production.; Previous attempts to calculate the option value for an exploration mineral rights lease used either stochastic differential equations or binomial lattice methods. These methods required the assumptions of a constant quantity of hydrocarbons discovered by the exploratory well and the investment in the exploratory and development activities occurring simultaneously and instantaneously. These assumptions essentially compressed the option within an option structure of the lease into a single option.; This study used the Monte Carlo simulation method to calculate the option value for the lease. This method is flexible and robust enough to include a variable quantity of hydrocarbons in the potential reservoir and a realistic time interval between the exercising of the imbedded options. This study demonstrated that including these assumptions significantly effects the option value for the lease. This study further demonstrated that modifying the decision criteria for exercising the options with a utility function adds no benefit in calculating the option value. A comparison of using the geometric Brownian motion pricing process to using a mean reverting pricing process in the option valuation exposed the impact of the pricing process assumption on exploration strategy.