Summary: This study aims to define a methodology supported in the concept of Real Options that will allow measuring the impact of variations in the execution of projects, on the value of the investment portfolio of the Production Vice-presidency of Ecopetrol S.A. (PRV). The proposed methodology involves the classification of the potential value of the Real Options and the valuation of the same using the Binomial method, the Montecarlo simulation, and the calculation of explicit volatility; while proposing the 3D graphic representation of the so called portfolio of Real Options.

The resulting methodology was validated using a real case of variation in two projects of the PRV portfolio in the year 2006 and it was possible to determine the way such change impacted the value of the same. This study aims to generate an important advance in management's way of thinking at Ecopetrol S.A., and the petroleum industry at large, basically in the recognition of the value that the sagacity of management decisions, regarding investment projects, has over the portfolio of the company.

Introduction

The totality of the variations of the projects led by Ecopetrol's PRV during the year 2006 were a consequence of decision making in reaction to the different causes and particularities of each project; this evidences a lack of formal and practical methodology to evaluate the impact of those causes and particularities, on the value of the portfolio.

The bibliography available on Real Options was analyzed in detail, in particular the way the investment portfolio of Ecopetrol S.A., is structured, approved controlled and monitored. Likewise, the uncertainty variables affecting petroleum companies were briefly analyzed; also the basic concepts of profitability, risk, diversification and the optimization of portfolios were reviewed, and the theory of Real Options and the formulation of the concept of a portfolio of Real Options were also analyzed to form the fundamental basis of this work.

The validation of the proposed methodology was based on the information obtained from the PRV portfolio for the year 2006, using a real case of variation occurring in two projects of the PRV portfolio during such year and it was possible to determine the way in which such changes affected the value of the same.

As a complement to the findings showing that the majority of the changes that took place within the PRV portfolio occurred due to planning and maturity faults, the authors propose a methodology of cost optimization and control for Ecopetrol's PRV projects, and which is set forth in the thesis presented by the authors.

Theoretical Background

The theory of Real Options (RO) constitutes one of the most important basis of modern financial theory and it is placed among the most innovative and complete decision-making methodologies, especially because it can be used in situations of high uncertainty and where the resources needed to carry out the project are high, as in the case of the petroleum sector.

Successive theoretical studies have demonstrated that the net value of investment projects is a function of its RO's, which define the acceptance or rejection of the same. One of the main objectives behind the implementation of RO in petroleum companies is related to capturing the flexibility value available at the time of making strategic investments, which when shown schematically (graph 1) represents the additional value added in virtue of the capacity of management to react when faced with new information obtained, after decisions have been made and over which there is no flexibility, as in the case of Discounted Cash Flow (DCF).

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