Application of price uncertainty quantification models and their impacts on project evaluations
Loading...
Date
2006-10-30
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Texas A&M University
Abstract
This study presents an analysis of several recently published methods for quantifying the
uncertainty in economic evaluations due to uncertainty in future oil prices. Conventional
price forecasting methods used in the industry typically underestimate the range of
uncertainty in oil and gas price forecasts. These forecasts traditionally consider
pessimistic, most-likely, and optimistic cases in an attempt to quantify economic
uncertainty.
The recently developed alternative methods have their unique strengths as well as
weaknesses that may affect their applicability in particular situations. While stochastic
methods can improve the assessment of price uncertainty they can also be tedious to
implement. The inverted hockey stick method is found to be an easily applied alternative
to the stochastic methods. However, the primary basis for validating this method has
been found to be unreliable. In this study, a consistent and reliable validation of
uncertainty estimates predicted by the inverted hockey stick method is presented.
Verifying the reliability of this model will ensure reliable quantification of economic
uncertainty.
Although we cannot eliminate uncertainty from investment evaluations, we can
better quantify the uncertainty by accurately predicting the volatility in future oil and gas
prices. Reliably quantifying economic uncertainty will enable operators to make better
decisions and allocate their capital with increased efficiency.
Description
Keywords
Uncertainty, oil prices, Project evaluations, forecasts