On the valuation of natural resources: Real options analysis of marginal oilfield-development projects under multiple uncertainties

Theophilus Acheampong*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

5 Citations (Scopus)


This paper shows the applicability and the value of real options analysis (ROA) in valuing a marginal undeveloped discovery in the UK Continental Shelf (UKCS) under multiple project uncertainties, namely geology, costs, and oil prices. Marginal fields can prove uneconomic when developed under prevailing circumstances such as technical (reservoir size, infrastructure distance and remoteness, crude-oil type) or commercial issues (oil prices, high cost of development, lack of third-party-access arrangements), among others. As such, using traditional discounted-cash-flow (DCF) methodologies such as the net present value (NPV) might not adequately value the embedded options that these uncertainties create, leading to a rejection of the investment decision. Hence, we assess if the valuation differs if valued by the traditional DCF approach compared with ROA. We develop a valuation model for the traditional DCF and real options and specifically model the flexibility in the options to delay, abandon, or expand the field anytime during the relinquishment requirement period considering these multiple uncertainties. The binomial lattice and later the Black and Scholes models are used to model the options because of the flexibility they provide in incorporating early exercise. The results indicate that the DCF values lag those of the option values for the deferral and expansion options. In contrast, the abandonment option exhibited only a marginal change with respect to the DCF value. A significant implication of this finding is that management decision making will be better off considering these embedded options in their field-development and capital-investment choices.

Original languageEnglish
Pages (from-to)734-750
Number of pages17
JournalSPE Production and Operations
Issue number3
Early online date12 Nov 2020
Publication statusPublished - 11 Aug 2021


  • supply and demand pricing
  • supply and demand forecasting
  • asset and portfolio management
  • market analysis
  • risk management
  • energy economics
  • reserves evaluation
  • project uncertainty
  • strategic planning and management
  • assumption


Dive into the research topics of 'On the valuation of natural resources: Real options analysis of marginal oilfield-development projects under multiple uncertainties'. Together they form a unique fingerprint.

Cite this