Evaluation of an Investment Project in the Oil and Gas Sector Using the Real Options Method

Under conditions of uncertainty of market conditions, the need to consider flexibility in project evaluation and management is growing. This issue is most relevant for the oil and gas industry, which is characterized by a high level of capital intensity and volatility of oil prices. The traditional discounted cash flow approach, often used to evaluate such projects, does not always provide reliable results due to static assumptions with a high level of uncertainty. This study proposes the real options approach as a more flexible tool. Special attention is paid to the issue of project financing. In a low oil price environment, the suspension of a project leads to problems related to debt interest payments, especially when considering small projects. Therefore, the use of flexible type of financing with floating payments becomes necessary to manage financial risks and maintain liquidity. The author implements a real options approach combined with flexible financing for an oil and gas project.