Environmental assessment affects negatively the decision to invest when the production oil projects are evaluated under the traditional analytical methods such as net present value (NPV) because the environmental requirements generate a delay in the start-up process of the project. Contrarily, under real options approach if the delay period provoked by legal environmental requirements is close to the investment timing (postponement period) some decisions to invest may be unaffected. So, the decision-making process according to the real option theory is more realistic by taking uncertainty over future costs and output's prices, investment irreversibility, and managerial flexibility (as option to delay investment) in the decision to invest, so that the decision is not now or never (as in the case of NPV), but now or wait in the real option approach. This paper proposes an option model based on stochastic behavior of output's prices and its relationship with optimal rules of investments to estimate the investment timing period. The period length will be compared with typical production delay time in projects due to environmental restrictions in a offshore oil project in Brazil.


Traditional investment analysis, which accepts investments when the discounted values of their expected future cash flows (DCF) are positive and otherwise rejects them, is presently considered incorrect because of its inability of adequately account for the uncertainty. According to this DCF methodology, the delaying of starting production due to requirements of the environmental assessment (EA) affects negatively the decision to invest. Although the NPV rule is simple and easy to apply, it is built on wrong assumptions. It assumes generally that the investment option is irreversible, i.e., if the firm does not make the investment now, it will lose the opportunity forever (now-or-never proposition). In most cases, investments are irreversible and, in reality, capable of being delayed. Recent researches on investment stress the fact that firms have opportunities to invest and they must decide how to exploit these opportunities in a more effectively way. The use of Real Options Theory (ROT) has an important implications for managers as they think about their investment decisions as the exercise of a financial call option: It has the right but not the obligation to buy an asset whose price fluctuates stochastically (project) at the future time of its choosing for a pre-specified price (investment). It is often desirable to delay an investment decision and wait for more information about market conditions. On the other hand, uncertainty can also arise from government environmental regulations and according to ROT if this delaying period due to environmental assessment is close to the one of postponing investment or investment timing, the decision of investing is unaffected.

In Brazil, the start-up of petroleum projects demands the approval by governmental authorities of the EA. A full EA is costly (even more than $1 million), involving multidisciplinary professional teams and usually takes up to 5 years to complete, depending on the project's size and its location.

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