Title: A numerical scheme and real options modelling for evaluation of a hypothetical oil field under uncertainties

Authors: Behnam Aminrostamkolaee; Mohammad Hossein Ghaemi; Ali Safdari-Vaighani; Mahdiye Rostamkhani; Matin Sadat Borghei; Mohammad Hossein Pourkazemi; Abbas Shakeri; Teymour Mohammadi

Addresses: Department of Economics, Faculty of Humanities, Khatam University, Tehran 30, Iran ' Department of Accounting, Faculty of Social Sciences, Imam Khomeini International University, Qazvin 3414916818, Iran ' Department of Mathematics, Faculty of Mathematical Sciences and Computer, Allameh Tabataba'i University, Tehran 1489684511, Iran ' Department of Business Management, Faculty of Management and Accounting, Allameh Tabataba'i University, Tehran 1489684511, Iran ' Department of Culture in Cyber Space, Faculty of ICT Policies and Strategic Studies, ICT Research Institute, Tehran 1439955471, Iran ' Department of Economics and Political Sciences, Faculty of Social Sciences, Shahid Beheshti University, Tehran 1983969411, Iran ' Department of Theoretical Economics, Faculty of Economics, Allameh Tabataba'i University, Tehran 1489684511, Iran ' Department of Theoretical Economics, Faculty of Economics, Allameh Tabataba'i University, Tehran 1489684511, Iran

Abstract: This paper uses real options for evaluation of a hypothetical oil field under uncertainties. We have supposed that this oil field is located in Saudi Arabia. Our evaluation includes uncertainties of oil price and exchange rate. The analysis is done both for the fixed exchange rate regime and for the floating exchange rate regime. The proposed approach enables us to take the advantage of real option valuation to overcome the shortcoming of the discounted cash flow (DCF) method which neglects uncertainties. This paper uses an explicit finite difference method (FDM) to approximate the solution of the resulting equation. The numerical experiments show that the impact of the exchange rate, oil price volatility and the correlation coefficient between returns of oil price and exchange rate on the value of an oil extracting project is significant. In addition, the behaviour of the project value is studied as a function of exchange regime. [Received: May 6, 2019; Accepted: September 17, 2019]

Keywords: exchange rate regime; oil field value; real option; uncertainties; hypothetical oil field; finite difference method; FDM.

DOI: 10.1504/IJOGCT.2021.112873

International Journal of Oil, Gas and Coal Technology, 2021 Vol.26 No.2, pp.97 - 115

Received: 06 May 2019
Accepted: 17 Sep 2019
Published online: 08 Feb 2021 *

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