"Real Options Method" vs "Discounted Cash Flow Method" to Analyze Upstream Oil & Gas Projects.

Upstream oil and gas project is an example of multiyear investment that has many uncertainties in the whole of project life time (started from exploration, field development and production). Regarding those uncertainties, the executive management is often driven to make a new decision or strategy which may be totally different from previous taken decision. The Discounted Cash Flow (DCF) method is a most widely used quantitative method to appraise oil and gas field value. Unfortunately DCF method doesn't produce a complete figure of strategy which may address uncertainties appropriately. In contrary, Real Option method is a method that already captured those uncertainties through probability and volatility metrics. Real Option provides a complete figure of strategy for the whole life time, therefore Real Option method delivers more flexibility to the executive management in decision making process. [ABSTRACT FROM AUTHOR]