doi:10.3723/ut.33.171  Underwater Technology, Vol. 33, No. 3, pp. 171–180, 2016 www.sut.

org

Technical Paper
Spatially and temporally dispersed marginal subsea
field valuation. Part I: preliminaries
Sirous Yasseri
Safe Sight Technology UK

Received 21 June 2015; Accepted 20 November 2015

Abstract technology (Yasseri, 2013) and market conditions,

This is part one of a two-part paper on the economic valu- as well as the available infrastructure to tie-in.
ation of spatially and temporally distributed marginal sub- Investing under uncertainty is always a major issue
sea fields. Risks in subsea marginal field development for offshore projects where the period between dis-
arise from many sources, including the state of technology, covery and first production could take more than
oil and gas price, site condition, fiscal policy and regula- five years. In order to identify value-increasing pro-
tions. Economic evaluation provides a valuable insight in jects, companies generally use the discounted cash
how to improve the viability of a marginal field. Part I dis- flow (DCF) method, or the more advanced deci-
cusses the traditional methods of valuation, and then sion tree analysis (DTA). To gain more confidence,
describes how the real option (RO) valuation can be scenario (what if) analyses, payback period and the
applied for the valuation of scattered subsea reservoirs.
internal rate of return are also considered.
None of the fields are large enough to justify the capital
These methods, however, cannot properly cap-
investment for individual exploitation. In Part II, these
methods are applied to a case study and the relative ­merits
ture the value of flexibility to re-adjust plans to pos-
of methods are discussed. It is argued that RO valuation sible external and internal ‘shocks’ as a project
enables the determinants of successful development to be evolves. Moreover, traditional valuation tools give
identified. no insight about how these contingent future deci-
sions would affect the risk of a project during its
Keywords: subsea marginal field; spatially and temporally development period. The real option approach
dispersed reservoirs; architectural flexibility; operational flex- (Copeland and Antikarov, 2000) can help as an
ibility; economic valuation; real option insightful investment decision support tool. With-
out a suitable decision support tool, any decision is
Acronym list no more than opinion (Yasseri, 2012; 2015).
CAPEX capital expenditure Every country has its own way to define a mar-
CAPM capital asset pricing model ginal field, with the aim of providing the right
DCF discounted cash flow incentives for exploitation of smaller fields (Offia,
DTA decision tree analysis 2011). In this paper, the marginal field is defined
ENPV expected net present value
IMR intervention, maintenance and repair by the economics of recovering the reserves. The
IRR internal rate of return ease of extraction, e.g. reserves being in shallow
MM million (roman numeral representation) water or deep water requiring innovative technol-
MMbbl million barrel of oil ogy, is also reflected in the economic risk involved
NPV net present value
OPEX operational expenditure in this activity. Except for very deep water, current
RO real option technology enables all reserves discovered by drill-
WACC weighted average of cost of capital ing to be produced, but the cost of development
and the fiscal policy establish the limits of accepta-
ble economic reserve size.
1. Introduction This paper considers development of temporally
Marginal offshore oil and gas fields can be a valua- and spatially distributed offshore marginal fields
ble source of energy, but their development may using a hub/host concept. Part I lays the theoreti-
depend on the government fiscal policy, state of cal foundation and Part II (Yasseri, 2016) describes

171
 Yasseri. Spatially and temporally dispersed marginal subsea field valuation. Part I: preliminaries
the detailed valuation using a case study. Results
presented in Part II emphasise the need for meth-
odologies to support the decision-making process,
especially when investing in situations without a
convincing track record.
2. Development strategy
The primary drivers of the development of m
­ arginal
offshore fields are:
• schedule – earliest possible start-up;
• cost––life cycle cost (capital expenditure (CAPEX)
and operational expenditure (OPEX));
• environment – impact of the development on
the environment;
• technology – new technology, or improvement
of the existing technology;
• capacity utilisation – use of existing infrastruc-
ture, facilities upgrading and life extension (if
needed);
• facilities integrity – reliability, availability and
safety;
• intervention, maintenance and repair (IMR);
• government fiscal policy and local content
requirements.
Table 1 outlines various strategies for the develop-
ment of a field.
The key parameters for economic viability are:
• acquisition and field licensing cost;
• hydrocarbon type, quantity in place and recover-
able reserves;
• oil and gas price;
• development strategy;
• enabling technology;
• infrastructure costs – design, procurement, fab-
rication, installation, operation and decommis-
sioning costs;
• forecasted production and revenue accounting
for costs;
• fiscal policy, taxation, royalty and other claims
on the profit;
• regulation, regarding the local content and
emission in some parts of the world;
• the hurdle rate (internal rate of return) – in an
unstable environment the payback period may
become a primary tool.
3. Architectural and operational flexibilities
There are two types of flexibility over the life cycle
of a system: operational and architectural (Lin
et al., 2009). Operational flexibility refers to the
ease of modifying the operating strategies without
changing the system architecture or configuration.
172
­ perational flexibility must be built into the design
O
at the selection phase. It allows operators to react
to the current or near term conditions without the
need to modify the system. For example, ability to
control production from many wells in response to
demand is an operational flexibility. Active r­ eservoir
management, such as changing oil or gas produc-
tion rates and injection rates, are also operational
flexibility.
Architectural flexibility has long-term impact,
while operational flexibility focuses on near term.
Architectural flexibility sometimes enables opera-
tional flexibility. For example, in the development of
a deep-water field, tieback flexibility enables alloca-
tion of production capacity among multiple fields
(Lin et al., 2009). Architectural flexibility is built into
a system at the design stage. It allows the system to be
modified, with little or no reconfiguration, in order
to accommodate new requirements. A flexible field
architecture approach allows a staged deployment
(Yasseri, 2014) of the entire field in order to maxim-
ise the investment in the infrastructure. Staged
deployment means that as the flow in some reser-
voirs decline, the excess processing capacity can be
used to tie-in a new reservoir, leading to a smaller
central processing facility. Alternatively, if demand
exceeds the current capacity, the central processing
facility can be upgraded, provided that higher struc-
tural strength was built into the substructure during
design for the future expansion. This approach does
not design for a target capacity but tries to find an
initial architecture that will give system managers the
flexibility to adapt to market and field conditions.
The constraint that this approach can impose is
the use of the facility as designed and constructed
(without considering room for expansion), which
limits available choices in the later stages. This con-
straint can be removed, at a cost, by providing the
additional space for expansion on the central pro-
cessing facility upfront. Another issue is the cost for
embedding flexibility into an architecture where its
usefulness is uncertain. Uncertainties have to be
modelled and integrated into the design process.
This marks a distinct departure from the traditional
approach because market conditions are not usu-
ally taken into account by designers.
Building flexibility into a design is an option that
gives the right, but not the obligation, to utilise it.
Built-in flexibility enables operators to react appro-
priately and in a timely manner to emerging condi-
tions, without starting from scratch. For example, a
host platform may be designed with stronger sub-
structure than needed now, with the intention to tie-
back new reservoirs when they are found; and there
is a good of chance of finding new reserves. Such
extra strength gives flexibility to expand, but it
Underwater Technology  Vol. 33, No. 3, 2016

Table1: Various strategies for the development of a field

Fast track/early
production
Exiting facility
Directly to shore
Hub facility/host platform
concept
Leased facilities
Shared production
systems
Standalone facility
May be necessary to improve the project economics by bringing in revenue much faster, or to meet
regulatory deadlines for concession.
This considers the use of an existing facility (owned or rented) for processing, metering and
exporting/transport of produced hydrocarbon (Livingston et al., 2003).
This considers an existing transportation system, or possibly constructing a new pipelines for a gas
producer well that is not far from the shore; and if the new infrastructure can be reused in future with or
without modification.
A hub facility accepts and processes hydrocarbon from several marginal fields, which may belong to
different owners, and is usually designed to service numerous fields. Alternatively, it may be an existing
facility in a mature field with spare capacity that can be upgraded if needed. A hub may receive produc-
tion from wellhead platforms, subsea tie-backs or from other processing platforms. It can even be an
onshore facility, if distance does not cause problems. A host must have the capacity to process and
meter production from the tied-in fields and to have storage capacity (either on board or in a nearby
floating, production, storage and offloading (FPSO) system/tanker) or export capacity for both gas and
liquid products via export pipelines. Water processing and injection facilities, as well as gas compres-
sion and liquid boosting equipment, may also be required.
The facility is owned by another party. Production equipment specifically hired and brought to the
site, while shared production facilities make use of the existing infrastructure. Leasing implies less
CAPEX but more OPEX with significant impact on economics, accounting, taxation and lease agree-
ments, as the treatment of both types of expenditure for accounting and taxation purposes are very
different.
The focus is on the use of the excess capacity of existing infrastructure within a producing area. These
facilities include: offshore storage vessels or onshore tank farms; export pipelines, inter and intra field
flowlines; export terminals and offshore berthing facilities; loading and offshore buoys; gas export and
compression facilities. The service providers manage their facilities and are also responsible for all
certification and regulatory interfaces (Soeters et al., 2002).
This is a broad classification that can include conventional type developments where there are no
unique schedule requirements or existing infrastructure; facilities such as fixed platforms with or without
nearby storage facility, floaters with nearby storage (example includes tension leg platforms (TLPs) and
semi-submersibles) or own storage. Storage facilities are useful for the liquid products (Zhang et al.,
2013; Zhang, 2014). Gas requires pipelines for transportation.

comes at a price. As finding new oil reserves is uncer-
tain, the question is how much one could reasonably
invest to create flexibility under such uncertain
conditions. This question can be answered by using
the RO method (de Neufville and Scholtes, 2011).
In this study, it is assumed that flexibility is provided
by design, thus enabling reconfiguration of the
architecture after it has been deployed. RO approach
allows investors to focus on the value of flexibility
without having any technical knowledge of the way
to embed it. It is further assumed that it is feasible to
embed flexibility and the cost can be justified.
Lin et al. (2013) presents a methodology that
evaluates three kinds of flexibility: the ability to tie
back new fields; the ability to expand the capacity
of a central processing facility; and the dynamic
allocation of processing capacity to connected
fields. The methodology uses a mid-fidelity model
in conjunction with Monte Carlo simulation. An
experienced subsea systems architect can narrow
them down to just a few alternatives (Yasseri, 2015).
4. Processing facilities
The processing facility and means of transporting
the product are major cost components. Hence,
the most cost-efficient way of developing scattered
marginal fields is via a subsea development, and
tying them to an existing processing facility, if pos-
sible. This puts an emphasis on the order and tim-
ing of the development, as inefficient timing
reduces the total value of the oil fields.
Depending on the location or the number of
reserves, a fixed platform or a floating facility is
required. If an infrastructure does not exist or the
life of the field is not long enough to justify an
export pipeline, an FPSO vessel may present itself
as a viable option, provided the produced gas can
be reinjected. FPSOs are best utilised for fields
that primarily produce oil (Soeters et al., 2002).
The oil is stored in the FPSO’s hull; the gas can be
used for fuel, reservoir support and/or re-injection
of excess gas; and the produced water must be
processed and then disposed of. A FPSO has a
large deck with enough space for multiple pro-
cessing packages and which can have equipment
added later, if needed.
FPSOs are the preferred floating production
option for small fields spread over a large area (Xia
and D’Souza 2012). Spread-moored vessels are also
acceptable for most locations and can accommo-
date a large number of wells, since there is no ­turret

173
 Yasseri. Spatially and temporally dispersed marginal subsea field valuation. Part I: preliminaries
to limit swivel paths. For a staged development
plan, the FPSO should be designed to allow for
field expansion. This could include excess process-
ing capability, additional riser/umbilical, caissons
and porches, and gas handling (e.g. reinjection
facilities).
5. Fiscal regimes
Many factors are considered when an oil company
determines the economics of a discovery, and often
fields have to wait for favourable technological or
market conditions. Governments around the globe
increasingly are offering incentives to induce oil
companies to give their marginal fields another
look. Marginal field legislation and incentives cover
a wide spectrum of styles and methods, including
tax holidays, reinvestment incentives and sliding
scale royalties. Every country has a different petro-
leum policy to suit its national needs. Whatever the
regime, the perceived economic returns under a
tax and fiscal regime must be higher than the cost
of extraction.
The regulatory framework governing the admin-
istering of oil leases differs from region to region,
although some basic process, charges and operat-
ing agreements are common to all. Government
levies consist of royalties, corporation taxes, and
special taxes such as petroleum profit tax, which is
common in most regions (Kasriel and Wood, 2013).
This also is a major factor in tipping the scales
between marginal and viable fields, in terms of eco-
nomic considerations.
Various regulatory bodies have tried to improve
marginal field economics by implementing certain
incentives. In the UK North Sea, for instance, the
payment of royalty and petroleum tax has been
abolished for the recent oil leases (KPMG, 2012).
Tax breaks and investment tax relief are usually
given for new developments as well. However, the
use of the ‘ring fence’ approach, in which a pro-
ducing field is subject to certain tax rates and not
eligible for tax breaks, has a detrimental effect on
marginal field developments adopting the hub
facility or host platform concepts, as they could
affect the categorisation of the facility.
6. Valuation methods
Investments in the marginal offshore oil and gas fields
are irreversible and costly, and their profitability is
uncertain. These characteristics cause complexity in
the decision-making process. Some projects count on
strategic flexibility to enable the optimum moment of
completion, expansion, contraction, interruption or
abandonment, depending on the market conditions
174
and fiscal policies. However, cold stocking (also
known as moth-balling) a facility is costly and only
resorted to when the market recovery is expected to
be long.
Governments around the world introduce or
withdraw incentives in order to maximise their share
of profits. Thus, investors are exposed not only to
the project risk and the market risk, but also to the
risk of government policies. In an uncertain market,
investors need to consider strategic options stem-
ming from operational and management flexibility
to decide whether to carry out the project, modify it
during development or operation phases, or simply
postpone it and wait for more information.
6.1. Traditional methods
To date, the standard DCF model is the benchmark
valuation model, because of its simplicity. The
model calculates the net present value (NPV) of an
investment, based on its future cash flow, adjusted
for the time-value of money and risk. The tradi-
tional DCF technique is appropriate in situations
with low degrees of economic and technical uncer-
tainties. The objective of DCF is to sum the net cash
flows and discount them at the weighted average
cost of capital (WACC), or other discount rate, giv-
ing a static net present value (NPVstatic). The DCF
decision rule states that a business should invest in
projects that have a positive NPVstatic.
The discount rate in the DCF model addresses
the time-value of money and some market risk. The
most common way to estimate the cost of equity
within corporate finance is by use of the capital asset
pricing model (CAPM) (Copeland and Antikarov,
2000). The CAPM states a linear relationship
between the return on a stock and its beta, the
­market risk premium and the risk-free rate. Out of
these, only beta is individually defined for an invest-
ment. Beta is a measure of the volatility, or system-
atic risk, of a security or a portfolio in comparison
to the market as a whole. Beta is the tendency of a
security’s returns to respond to swings  in the market.
A beta  of 1 indicates that the security’s price will
move with the market. A beta of less than 1 means
that the security will be less volatile than the market
and vice versa (Copeland and Antikarov, 2000).
The market risk premium and the risk-free rate
should be the same for all stocks. Historically, the
anticipated internal rate of return (IRR) for mar-
ginal fields is only between 8% and 18%, whereas
for large projects IRR is between about 20% and
30%. IRR is a primary measure for investment
­decision for oil and gas companies, where cost of
capital is typically used as a decision basis. Large oil
companies require larger IRR as they are very
exposed, i.e. their risk expenditure is higher.
Underwater Technology  Vol. 33, No. 3, 2016
Alternatively, DTA, which is a version of DCF and
was developed in the 1950s (Brach, 2003), is more
suitable for the valuation of projects that have a
high degree of technical (technological) uncer-
tainty and a low degree of economic uncertainty.
DTA is where discrete probabilities are assigned to
potential outcomes at each stage of the valuation. It
happens that projects have a symmetric pay-off
structure. As a result, it is possible to assign discrete
probabilities to various outcomes, making DTA a
good valuation technique. The difficulty with DTA
lies in obtaining reliable probabilities of success for
each stage of development.
Some firms’ capital-budgeting decisions are
based on the expected net present value (ENPV)
model, which is a variation of DTA models. It was
specially developed to capture the effect of techni-
cal uncertainty (represented by probabilities to suc-
ceed for each phase) on the value of projects. If the
prediction of the future cash flows of the project is
uncertain, the DTA models are supplemented with
sensitivity and scenario analyses.
Sensitivity analysis ranks input variables of the
future cash flows (amount of extractable hydrocar-
bon, unit price, unit costs, etc.) according to their
contribution to the risk of the project present value.
Analysts attribute, to the most risky input parame-
ters, their possible minimum and maximum values
and compute the ENPVs of the project that corre-
spond to these extremes. However, the calculated set
of mutually exclusive outcomes of the project value
does not facilitate the undertaking of the right
investment decision because the true probability of
each outcome is unknown. For this reason, Monte
Carlo simulation (Motta el al., 2000; Adamu et al.,
2013) is used to gain more insight into uncertainties.
6.2. Real option method
Another approach is the real option (RO) method,
which is suitable for proven undeveloped reserves
because the owner has the right, but not the obliga-
tion, to develop such reserves, before the expiry of
the lease. Hence, the total value includes the DCF
value plus some additional value of a timing option,
particularly regarding the volatility of unit prices.
For example, if the DCF of a marginal field is $1000
MM and it costs $1000 MM to develop it, then the
NPV is zero. Development of this reserve has not
much benefit according to the traditional decision
criteria, but the economic value of the field is not
really zero. The concessioner may have years before
losing the right. The lower bound of NPV may be
zero, but there is no inherent upper bound (de
Neufville, 2003).
The theory of ROs is an extension of financial
option (Copeland and Antikarov, 2000). A call
option gives the holder the right, but not the obli-
gation, to buy a security at a specified price in the
future. The buyer of the call option is taking an
optimistic view of the stocks underlying the call
option. Similarly, a capital investment today that
gives the investor the future right, but not the obli-
gation, to make a further investment is a RO. A vari-
ety of factors can influence the value of the option.
For example, as the value of the stock (or the pre-
sent value of the expected cash flows) increases, so
does the value of the call option.
Another critical difference between NPV and
ROs is the effect of uncertainty (or risk) on value.
Uncertainty typically is considered bad for the valu-
ation of traditional cash flows. In contrast, uncer-
tainty increases the value of ROs. So, in today’s
uncertain environment, the value of options actually
increases. After an investment is made, time passes,
uncertainty is resolved and the present value of
cash flows (analogous to the future value of a stock)
can be calculated more accurately. If the environ-
ment is volatile, then the chance that the value of
the project in the future will exceed the necessary
investment (or, in other words, that the NPV will be
positive) is higher.
Table 2 gives definitions of variables for three
types of options: financial, real asset (e.g. real
estate, airport, etc.) and oil and gas asset. Due to
these similarities, the financial option pricing meth-
ods are used for valuation of real assets (Copeland
and Antikarov, 2000).
The following six categories of ROs are men-
tioned in the literature:
• option to postpone/defer;
• option to change the scale (expand or contract);
• option to abandon;
• option to switch;
• compound option;
• option to grow.
6.3. Binomial real option model
The binomial approach is one of several methods of
solving the RO equation (Copeland and Antikarov,
2000). The binomial model is more widely used,
due to its versatility and ease of use. The binomial
model (Fig 1) represents the price evolution of the
option’s underlying asset as the binomial tree of all
possible prices at equally-spaced time-steps from
today.
It assumes that at each step, the price can only
move up and down at fixed rates and with respec-
tive pseudo-probabilities (Ρu and Ρd ). In other
words, the root node is today’s price, each column
of the tree represents all the possible prices at a
given time, and each node of value S has two child
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 Yasseri. Spatially and temporally dispersed marginal subsea field valuation. Part I: preliminaries

Table 2: Analogies between financial and real options

Terminology Oil and gas project Tangible assets Financial (stock) option
Market value of PV of economically recoverable PV of expected cash flows Stock price
underlying asset reserves; using an appropriate
discount rate
Exercise price PV of development PV of investments Option price or premium is the price
Costs (CAPEX) paid to acquire option
Time to expiration Negotiated Time period in which Time to expiration, which is a date
development period when investment can be when the option expires, i.e. beyond
license is granted undertaken which the option has no value.
Volatility Volatility of oil and gas price Volatility of project value Volatility of stock price
Risk-free interest Risk-free interest Risk-free interest rate Risk-free interest
Rate rate Rate, e.g. interest on government’s
bounds

Fig 1: Binomial tree showing up and down movement of the underlying value.

nodes of values S.u and S.d, where u and d are the from which it can be deduced:
factors of upward and downward movements for a
e rdt − d
single time-step (dt). Variables u and d are derived Pu = (4)
from volatility (s): u −d
From the binomial tree representation, the
u = e −σ dt
(1) option price can then be sequentially derived for
each node of the tree, starting at the leaves. At each
and timeline (i.e. at option expiry) calculation of call
option (Vcall) and put option (Vput) prices are
d =eσ dt
(2) straightforward:
Ρd is simply equal to 1– Ρu, and Ρu is derived Value of call
from the assumption that over a period of dt the      option = Vcall = Maximum of (S – X, 0) (5)
underlying asset yields the same profit as a riskless
If market price (S) at expiry date is greater than
investment on average. Therefore, if it is worth S at
strike price (X), a call option has a value of (S – X)
time t, then it is worth S·e rdt at time t + dt. This leads
or zero, and:
to the following equation:
Value of put
S·e rdt = (Ρu·u·S + (1–Ρu)·d·S )(3)      option = Vput = Maximum of (X – S, 0) (6)

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Underwater Technology  Vol. 33, No. 3, 2016
Similarly, if market price (S ) at expiry date is
lower than strike price (X ), a put option has a value
of (X – S ), or zero.
Having calculated all possible option prices at
expiry date, the calculation start rolling back to the
beginning, using the following formula:
Vt = (Ρu·Vu,t+1 + Ρd·Vd,t+1)·e–rdt  (7)
where Vt is the option price for one of the nodes at
time (t), and Vu,t+1 and Vd,t+1 are the prices of its two
child nodes. This formula is derived from the
observation that an option that is worth Vt at time (t)
is worth Vterdt at time t + dt, and its expected value
on the other hand, which is by definition:
Ρu·Vu,t+1 + Ρd·Vd,t+1(8)
7. A case of developing a dispersed marginal
offshore field
7.1. Field description
Fig 2 shows the layout of a hydrocarbon basin which
is used for a case study in this paper. It involves 17
known small fields of different sizes. Some of these
are discoveries and some prospects, but none of
them is individually large enough to justify the cap-
ital investment of a dedicated central processing
facility, such as a floater or a fixed structure. There
are also a number of possible reserves yet to be
explored. Approximately 10 km from the major
reserves (R1~R5), the water depth reduces to 70 m;
hence, a fixed jacket may be a suitable hub for
receiving, processing, and exporting oil and gas
gathered from the five largest core discoveries (i.e.,
R1~R5) through subsea development. Potentially
other fields (i.e., R6~R10 and R11~R17) can be
tied back directly, or via R1~R5 facilities, provided
such flexibility is built into subsea manifolds and
flowlines as well as the central processing facility.
Thus, the successful development of R6~R17
depends on the successful development of R1~R5.
The resource is spread over 400 km2 in water depths
of 150 m–550 m.
Total extractable reserves for R1~R3 have been
estimated to be 164 MMbbl of oil and 7160 MMsm3
of gas. It is expected the crude production will peak
in the second year with 30.3 MMbbl crude. After
the second year, production is assumed to decrease
relatively quickly to 4.0 MMbbl, and continue to
decrease before it reaches 3.3 MMbbl during the
last years of the project’s lifetime (Fig 3). A similar
profile is assumed for the gas production (Table 1
of Part II, Yasseri, 2016).
The extractable reserves are characterised by
the uncertainty (P10–P90) of the estimate as
105.5 MMbbl and 194.4 MMbbl of oil, respectively.
Shore R12
R14
R15
R13
R4
75 KM
Hub
R3
R7
70 m
R16
R5
R2
100 m R6 R1 R8
R17
R9
350 m
R10
505 m
450 m
Fig 2: Layout of the example subsea reserves.
Thus, the total amount of extractable oil is as fol-
lows: 164 MMbbl is the base case, 105.5 MMbbl is
the pessimistic case and 194.4 MMbbl is the opti-
mistic case. The same relative relationship is used
for gas (Fig 3), resulting in 7872 MMsm3 as the
base case, 5215.5 MMsm3 as the pessimistic case,
and 9347.6 MMsm3 as the optimistic case. The
same production profile is used for all cases.
7.2. Staging and phasing
Concession, licensing and exploration phases are
excluded from this study. It is assumed that the
operator has all necessary information about the
total amount of extractable reserves and produc-
tion rates to move forward. Hence, the first stage in
this study is the appraisal phase, when the company
should decide on a development concept. A con-
cept is defined by the required production capacity
of the facilities and the option to increase this
capacity at a later time. Such decisions should
include capacity rate, processing capacity, storage
facility and transportation. Operators may decide
to stage the production by providing only equip-
ment that is required for now, but allowing room
for expansion, namely by investing in stronger sub-
structure which allows flexibility to expand capacity
in future. Such a decision requires evidence that
there is value in flexibility. At this stage, the com-
pany has the choice to wait and see or to abandon
the project. The product at this stage of the project
is the generation of several alternative concepts.
Given favourable predictions the company will
proceed to the concept selection, design and per-
mitting, and finally move to project fabrication,
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 Yasseri. Spatially and temporally dispersed marginal subsea field valuation. Part I: preliminaries
Oil production profile in MMbbl
32
30
28
26
24
22
20
18
MMbbl
16
14
12
10
8
6
4
2
0
2020 2022 2024 2026
Fig 3: Oil production profile (gas production has a similar profile).
procurement and installation. Consequently, oil
and gas investment can be modelled as a com-
pound option: each stage provides a decision point
to move on to the next stage. The data collection
and appraisal stage requires consideration of cash
flows which are needed for periods 2 to 5 (Fig 1).
Government incentives can be seen as options
occurring to the prospective owner. The investor must
decide whether to spend on knowledge-gathering
regarding the price movement, consumers’ demand
and government policies. This helps to decide if it
is worthwhile to install adequate capacity to pro-
duce now, to stage the production or to delay the
investment.
Concept selection typically involves relatively
small expenditures. Also, the decision to invest can
be influenced by the state of the firm’s other assets.
Delaying investment and beginning development
is not always straightforward, as assumed by the RO
models.
7.3. Concept selection
Subsea production systems allow production from
multiple drilling centres, and single wells are also
easily accommodated. Tie-back distances of over
15 km are feasible from a flow assurance stand-
point. The type of well installation (platform or
subsea) is often determined by water depth, as
well as reservoir size and density. Fixed platforms
are often used in shallower water depths that con-
tain concentrated accumulations, which can be
reached from a single location. Subsea production
can be used in any water depth, but they are nor-
mally used in deeper water, where fixed platforms
become more expensive, or there is insufficient
resource density.
178
2028 2030 2032 2034 2036 2038 2040
Year
Subsea development is the most appropriate
choice for this field, as the development can be
phased. However, since the location is far from
shore and flow assurance is a major concern, then
a gathering hub is also needed. It is decided to
tie-back R4~R5 to a fixed platform in shallow
waters. The flowlines can be used for tying the
rest of reservoir later on. The first phase is to
tie-in R1~R3.
8. Conclusion
Fig 4 shows a flow chart of valuation methods dis-
cussed in this paper. It should be noted that there
are many variations on these themes.
There is a great potential for using financial
asset pricing theories for the evaluation of real
assets, as well as for capital allocation decisions,
businesses valuation and assess performance. Part I
has briefly discussed DCF, ENPV and the binomial
approach to RO, which is designed to provide a
better understanding of strategic values of real
assets.
Reservoirs are too small to warrant an inde-
pendent production unit, however, they can be
developed by a central production unit as a hub/
host, fixed or floating. The operator also has to
decide when to abandon the field and decommis-
sion the installation, by taking into account
future production as well as equipment life and
operational cost. The problem of optimal invest-
ment timing interests practitioners who are assess-
ing investment in petroleum production. The
main decision in a petroleum production project
is if and when the field should be developed.
Depending on the field and the technology used
Underwater Technology  Vol. 33, No. 3, 2016

Data gathering

Hydrocarbon
Prices CAPEX Taxation
type

Licence expiry
Demand OPEX Fiscal policy
date

Production Existing Bank loan

Decommissioning
profile infrastructure interest

Cost of capital
Extractable Time to first Regulations &
and the
reserves oil or gas policies
hurdle rate

Conventional methods

Conventional DCF DTA & expected Monte Carlo analysis

NPV, ROI, IRR, NPV (probability
payback time, (estimate discrete distribution of
breakeven analysis probabilities) parameters)

Sensitivity analyses (what if),

scenario analyses
If uncertainty is high and its
consequences cannot be ignored

Real option valuation

More data

Price volatility Underlying value Risk neutral

(DCF) probability

Choice of solution methods

Differential equations

Dynamic
Simulation programming Binomial method

Available actions

Abandon/ scale Expand

Wait/postpone
down

Fig 4: A flow chart of valuation methods.

for production, the operator might also have References

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