Applications of modern asset pricing methods to project valuation in oil and gas industry

Investment projects in oil & gas sector are usually characterized by long payback periods and a considerable number of risks involved. Thus, valuation of E&P projects is a complicated task implying structuring and estimation uncertainty. This paper analyses and provides examples of  application “modern asset pricing” for mitigating drawbacks of DCF-method in valuation E&P projects. Essay gives examples of evaluation of projects in the oil industry (based on historical figures) and the mega-project to develop the helium resources in the east of the Russian Federation. In the first case direct verification of two methods was performed — for assessing the adequacy of the results in comparison with the dynamics of actual figures. The audit shows that "modern asset pricing" method generally gives more accurate results (with actual verification) and doesn’t underestimate the project efficiency indicators — in opposite to the conventional discounting method, which is prone to excessive determinism. In the second case, we study complicated "super long" project whose evaluation with use of standard techniques under current organizational, economic and technological conditions often gives disappointing results, which is contrary to common sense and the successful experience of helium industry in other countries. An important result is the following: modeling of helium megaproject using the methods of "modern asset pricing" allows you to not only get a more adequate estimate of the economic efficiency, but also take a new view at the approaches to implementation.

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