Abstract
Many offshore heavy oil discoveries in deep waters can be considered valuable assets if new technologies are available to transform geological successes into economic successes through projects of development and production. But, there are some latent questions: i) how to forecast future technology advances in order to produce this heavy hydrocarbon?; ii) how companies can estimate development cost for the next five to ten years?; iii) with which degree of certainty will new technologies be available to reduce present production costs for these oil types? This paper proposes the application of the theory of option pricing for valuation and decision-making in opportunities to invest in projects to produce heavy oil in a deep water environment. The first uncertain variable is oil price, which evolves over time as a Geometric Brownian Motion. The second uncertain variable is the impact of advances of production technology on production cost that evolves as a Poisson process. The assumptions in oil price modeling are based on continuous fluctuations over time. In case of production technology, we assume that advances take place in a discrete way through jumps that can represent gains, which may enable the firm to produce with greater efficiency reducing costs. This timing model is applied for valuation and decision-making of a typical heavy-oil project located in Campos basin in Brazil (15 °API, 2900 m water-depth). This production includes 7 production and 7 injection wells. Preliminary results show that the investment-rule is far from that of traditional NPV (that is, invest as long as NPV>0), especially in case of increasing oil pricing volatility and size and arrival of technological innovations.
