How Real Options Sees the Choice of Mutually Exclusive Alternatives to Develop a Project?
very interesting and important application. A large Petrobras-PUC research on this topic is starting up. The aim of this research is to compare alternatives of development, alternatives of investment in information, alternatives with option to expand, etc., before commit a large investment in an offshore oilfield development. One simple model is presented by Dixit: “Choosing Among Alternative Discrete Investment Projects Under Uncertainty”. Economic Letters, vol.41, 1993, pp.265-288. This model is summarized below, with a little adaptation using the concept of economic quality of a developed reserve(q). If the oil price values P and one barrel of reserve values V, the quality q = V/P. Here the NPV = q P B – D, where B is the reserve size (number of barrels) and D is the development cost (in terms of present value). The alternatives have different investment costs. Higher investment alternatives have benefit of faster production (more wells and/or higher processing facilities capacity)
