This paper analyzes the managerial flexibility embedded in oil reserves (such as gas and water injection techniques). We have concluded that these techniques can increase the value of oil reserves by up to 25% according to the theory of real options.The main advantage of the real options approach over the discounted cash-flow approach is to include the operational issues in the oil and gas industry. We have used two classical models to assess the value of oil reserves. We have also performed sensitivity analysis to confirm that both concession time and convenience and/or dividend yields are the most important factors.
Real options; oil and gas reserves; reservoir engineering