The Option to Switch from Oil to Natural Gas in Active Offshore Petroleum Fields Authors: Øystein Dahl HEM

An important decision in the development of a mixed oil and natural gas field is whether to produce or re-inject the natural gas. There is a trade-off between the income from the sale of natural gas and the higher oil production obtained from re-injection. We consider the optimal timing problem of when to stop natural gas injection for a set of offshore petroleum fields using a real options approach. The real options valuation prices the option to switch significantly higher than a net present value approach. A two-factor price model is implemented for both the oil price and the gas price. The option valuation is based on the Least-Squares Monte Carlo simulation algorithm.