Oil and Gas Exploration Valuation and the Value of Waiting

The timing flexibility of investments in oil and gas assets can potentially add value. In this paper we examine the value of waiting in exploration projects and propose a real option based valuation method using the Least Squares Monte Carlo Simulation. We show that the dynamics of the oil and gas prices have a large impact on the value of the option to wait; especially for projects with long lead times and durations. The uncertainty in the forward price curve is modeled using a two–factor stochastic price process. The paper also presents the valuation method in the form of MATLAB® functions and routines which can be used as an efficient test and analysis platform using the industry-standard input formats.