Using Real Options Analysis in Investment Projects Management in the Oil and Gas Industry

Despite the fact that the Real Options Analysis (ROA) provides more objective project appraisal than the traditional capital budgeting techniques, it has not received all the attention it deserves among practitioners. One of the main reasons for low practical implementation is cognitive distortions and biases of a decision-maker while analyzing the processes that give rise to the real option in a project. An objective investment attractiveness evaluation is of highly importance for oil and gas projects for the reason that they require huge investments associated with the bulk of risks and uncertainties. Thus, the purpose of the study is to develop a template for real options identification in the investment projects of the oil and gas industry with the aim to facilitate the use of the tool in practice. The author analyses the research articles of a practical nature on the theme, as well as the project “Baltic LNG” in order to identify the key factors which give rise to the real options and establish the dependence between the certain uncertainty and the corresponding type of the real option. The field of the study is limited to two types of oil and gas projects: (1) oil or gas field development and (2) construction of a plant for liquified natural gas production. Since the research is focused on the practical using of the proposed theoretical model it could shed some light upon the managerial scope of the real options analysis. The template developed consists of three blocks: (1) the preparatory phase, (2) the key project uncertainties identification, (3) identification of factors limiting the use of a real option.