Real options and genetic algorithms to approach of the optimal decision rule for oil field development under uncertainties

Juan G. Lazo Lazo, Marco Aurélio Pacheco, Marley M. Vellasco

Research output: Chapter in Book/Report/Conference proceedingChapterpeer-review

2 Scopus citations

Abstract

A decision to invest in the development of an oil reserve requires an in-depth analysis of several uncertainty factors. Such uncertainties may involve either technical uncertainties related to the size and economic quality of the reserve, or market uncertainties. When a great number of alternatives or options of investment are involved, the task of selecting the best alternative or a decision rule is very important and complex due to the considerable number of possibilities and parameters that must be taken into account. This paper proposes a new model, based on Real Option Theory, Genetic Algorithms and on Monte Carlo simulation to find an optimal decision rule for alternatives of investment regarding the development of an oil field under market uncertainty that may help decision-making in the following situation: immediate development of a field or wait until market conditions are more favorable. This optimal decision rule is formed by three mutually exclusive alternatives, which describe three exercise regions through time, up to the expiration of the concession of the field. The Monte Carlo simulation is employed within the genetic algorithm to simulate the possible paths of oil prices up to the expiration date. The Geometric Brownian Motion is assumed as stochastic process for represents the oil price. A technique of variance reduction was also used to improve the computational efficiency of the Monte Carlo simulation.

Translated title of the contributionOpciones reales y algoritmos genéticos para aproximación de la regla de decisión óptima para el desarrollo de campos petroleros en condiciones de incertidumbre
Original languageEnglish
Title of host publicationTheoretical Advances and Applications of Fuzzy Logic and Soft Computing
EditorsOscar Castillo, Patricia Melin, Oscar Montiel Ross, Roberto Sepulveda Cruz, Witold Pedrycz, Janusz Kacprzyk
Place of PublicationHeidelberg
PublisherSpringer Berlin
Pages445-454
Number of pages10
Volume42
ISBN (Electronic)978-3-540-72434-6
ISBN (Print)9783540724339
DOIs
StatePublished - 2007
Externally publishedYes

Publication series

NameAdvances in Soft Computing
Volume42
ISSN (Print)1615-3871
ISSN (Electronic)1860-0794

Bibliographical note

Copyright:
Copyright 2009 Elsevier B.V., All rights reserved.

Keywords

  • Genetic algorithms
  • Latin hypercube sampling
  • Monte Carlo simulation
  • Real options

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