Real Option Valuation of Offshore Petroleum Field Tie-Ins

We value two real options related to offshore petroleum production. We consider expansion of an offshore oil field by tying in a satellite field, and the option of early decommissioning. Even if the satellite field is not profitable to develop at current oil prices, the option to tie in such satellites can have a significant value if the oil price increases. Early decommissioning does not have much value for reasonable cost assumptions. Two sources of uncertainty are considered: oil price risk and production uncertainty. The option valuation is based on the Least-Squares Monte Carlo algorithm