thelossofcashflowsduringthedevelopmentperiod.Thus,if
thereisaone-yearlagindevelopmentandwecanestimate
thecashflowwewouldmakeoverthatyear,wecanestimate
thecashflowasapercentofourreservevalueanddiscount
thecurrentvalueofthedevelopedreserveatthatrate.Thisis
theequivalentofremovingthefirstyear’scashflowfromour
investment analysisand lowering thepresent value of our
cash flows.
ILLUSTRATION 12.6 Valuing an Oil Reserve
9
Consider an offshore oil property with an estimated oil
reserveof 50 millionbarrelsofoil;thecostofdevelopingthe
reserveisexpectedtobe$600million,andthedevelopment
lagistwoyears. ExxonMobilhastherightsto exploitthis
reserve forthe next 20 years, and the marginalvalue per
barrelofoil(priceperbarrelminusmarginalcostperbarrel)
is currently $12.
10 Oncedeveloped,thenetproductionrevenueeachyearwill
be5%ofthevalueofthereserves.Therisklessrateis8%,
and the variance in oil prices is 0.03.
Giventhisinformation,theinputstotheBlack-Scholesoption
pricing model can be estimated as follows:
Variance in the value of the underlying asset
11 = 0.03