barrels of oil and the average cost of developing these
reservesatthattimewasestimatedtobe$30.38billion(the
development lagisapproximately two years). Theaverage
relinquishmentlifeofthereservesis 12 years.Thepriceofoil
was$22.38perbarrel,and theproductioncosts,taxes,and
royaltieswereestimatedat$7perbarrel.Thebondrateatthe
timeoftheanalysiswas9%.IfGulfchosetodevelopthese
reserves,itwasexpectedtohavecashflowsthenextyearof
approximately5%ofthevalueofthedevelopedreserves.The
variance in oil prices is 0.03.
Note that we could have used forecasted oil prices and
estimatedcashflowsovertheproductionperiodtoestimate
thevalueoftheunderlyingasset,whichisthepresentvalueof
allofthesecashflows.Wehaveusedashortcutofassuming
thatthecurrentcontributionmarginof$15.38abarrelwould
remainunchangedinpresentvaluetermsovertheproduction
period.
Basedontheseinputs,theBlack-Scholesmodelprovidesthe
following value for the call.
14