The Digital Oil Field (DOF) has been embraced at the operational level in the exploration and production industry. The DOF has initially been applied to tactical and operational decision making, often with a focus on reducing operational costs. Yet, most DOF value estimates (e.g., CERA 2006) have indicated that the majority of the value contribution from the DOF will be through increased revenues, i.e., increased reserves or production. An outstanding challenge is to demonstrate how the DOF will enable this revenue-driven value creation.
Most E&P players have adopted a stage-gate project management process that consists of a series of crucial capital-intensive decisions. In making these decisions, it is not sufficient to analyze and evaluate the current decision stage. Future decisions at later stage-gates must also be evaluated, and the relevant uncertainties must be analyzed so as to maximize the insight about value creation. This is a challenge even for the traditional oil field. In the information-rich DOF, the challenge increases dramatically since the decision makers will have access to enormous amounts of data which will be provided in a manner close to real time. The decision makers need to relate the real time data to uncertainties and future decisions. Real options valuation offers the possibility of consistently addressing these strategic decisions.
In the past, real options valuation capabilities have been severely constrained by the limitations of the underlying models. In principle, real option valuation can incorporate any number of uncertainties and future decision points. However, in practice only a few uncertainties and decision points have been considered. The recently introduced real option valuation approaches can model any number of uncertainties and future decisions, thus capturing the information-rich environment of a DOF. In this paper, we will illustrate how modern real option valuation can be leveraged to create value from strategic decision making for the DOF.