Тема: Evaluation of oil investment projects under uncertainty using simulation methods

A fundamental issue in the field of strategic financial management is the choices and setting the correct course for the company.
There is a large amount of research in this field where the context for corporate strategic decisions and their impact on performance are studied. These strategic decisions imply investments which imply commitments of resources for future initiatives under uncertainty. Therefore, the role of uncertainty is essential when making these decisions.
The prices of raw materials rose during the first quarter of 2022, due to various Geopolitical and pandemic factors worldwide and with a continuous growth in demand having several restrictions in supply.
These events have caused a general increase in commodity prices when there was an economic recovery in mid-2020 with an increase in demand driven by easing concerns about the COVID-19 pandemic. This new time and trading of raw materials has been growing as the global economy recovers, while the commodity production sector is still well below its pre-pandemic level burdened by several years of weak investment in new capacity. production, and supply problems.
It is important to mention that this environment creates a high level of uncertainty compared to previous years, since oil is one of the most volatile raw materials in the world market.
Crude Oil Price Movements
Crude oil spot prices rebounded in January, compared to the previous month, as oil futures markets surged. Crude prices were supported by strong global oil market fundamentals amid dissipating fears about the impact of the COVID-19 Omicron variant and geopolitical risks, which raised concerns about near-term oil supply. The OPEC Reference Basket increased $11.03, or 14.8%, to settle at $85.41/b in January, its highest monthly value since September 2014. Similarly, crude oil futures prices increased on both sides of the Atlantic with the ICE Brent front month up $10.77, or 14.4%, in January to average $85.57/b and NYMEX WTI rising by $11.29, or 15.7%, to average $82.98/b. As a result, the Brent/WTI futures spread narrowed by 52$ to an average of $2.59/b. The market structure of all three crude benchmarks - ICE Brent, NYMEX WTI and DME Oman - strengthened significantly in January over the previous month as market perception of the outlook for the supply-demand balance improved. Hedge funds and other money managers turned more positive about oil prices, increasing net long positions to their highest level since last November.
Source: OPEC Monthly Oil Market Report - February 2022
Balance of Supply and Demand
Demand for OPEC crude in 2021 is revised up by 0.1 mb/d from the last month's assessment to stand at 27.9 mb/d, around 5.0 mb/d higher than in 2020. Demand for OPEC crude in 2022 was also revised up by 0.1 mb/d from the last month's report at 28.9 mb/d, around 1.0 mb/d higher than in 2021. In these charts’ projections of the World Bank, we can notice the world bank forecasts in October 2021 and the changes made with the new forecasts made in April of the current year, which have an upward trend in contrast to the previous estimates. Given that decision-making is fundamental in any field and to decide, and for the evaluation of projects, financial models are needed that provide useful and effective information, considering as much information as possible.
This being a time of great uncertainty at the global level, especially for raw materials such as oil and gas, with the oil price variable being highly uncertain in the macroeconomic context, which must be analyzed and will be decisive in the evaluation. The financial aspect of investing in an oil field project is closely related to the price, which determines whether an investment of large volumes of money and time like this could be profitable.
For the financial evaluation of our project, we must correctly measure the current conditions of high volatility and uncertainty because of the global economic political situation that we are facing....
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The oil investment evaluation case is a complex process that has an inherent risk, and several uncertainty factors play an important role in the successful evaluation of large-scale projects like this one that allow us to appreciate the benefits of real options.
The application of this approach can be implemented in all fields, but in projects with high uncertainty the benefits of RO can be better appreciated.
Using historical data, the volatility of these variables affecting the project and their probability distributions were determined stochastically, with oil being the variable with the greatest impact. The volatility of oil is uncontrollable and depends on international prices. In our analysis the exchange risk can be underestimated, but this variable can impact the success or failure of the project this variable behaves with less volatility.
Identifying and measuring risks and opportunities is a key factor for decision making and we must adapt to these changes. It is worth mentioning that OR does not replace traditional methods such as cash flow discounting, but it is a more sophisticated evaluation technique that acts as a complement, both techniques are a much more precise tool in valuation projects since the traditional way of valuing projects through the VPN assumes a single scenario without flexibility. This Flexibility is the strategic element in Real Options.
The use of OR maximizes the value of a project in all its stages. It increases the initial valuation integrating its flexibility and volatility in the face of possible changes. This approach allows continuous control of the status and scope of the project, being able to adapt to changes in the economic environment, allowing the application of options to maximize profitability.
We can conclude that applying the binomial tree model, the implicit value of the real options approach is obtained.
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