Investment and Project Value in Oil Field Development Using Real Option Pricing with Mean-Reversion with Jumps

The oilfield development is a high-risk venture and requires the largest outlay which is not Irreversible. This paper proposes a new model, based on Real Option Pricing with Mean-Reverting jump, to find an optimal decision rule for alternatives of investment regarding the development of an oil field under market uncertainty. The objective of this new model is to help decision-making in the following situation: appropriate biding for an oil field development, the optimal investment timing and the optimal transfer value of the oilfield if the investment opportunity to develop the field is not attractive. The uncertainty of oil prices is modeled as a mix jump-diffusion process. Normal information generates continuous mean-reverting process for oil prices, whereas random abnormal information generates discrete jumps of random size. Comparisons are performed with the Mean-Reversion Process and also the quantification and analysis of alternative timing policies for the petroleum sector.