Real options method for strategic economic evaluation of oil and gas exploration project

The traditional net present value(NPV) method is widely used in strategic economic evaluation and investment decision of a project,but it has some defects,because of the limitation of the method and the distinct characters of an oil-gas exploration project(OGEP) such as large investment,long period to recover,complicated technology and high-level risks.So,the true values of an exploration project may be underestimated,and a wrong decision would be got using NPV method.A new method,namely real options method,is introduced.The theorem and the characters of this method are discussed here. An example to apply real options method to the economic evaluation of an OGEP is given.As a new method,real options method brings a great change to people's opinions.The uncertainty of an object can be no longer taken as a negative factor.Instead,the people may focus on how to take the advantages of uncertainty and get more rewards.