Decommissioning of petroleum installations on the Norwegian continental shelf : a real options approach

2016

Many fields on the Norwegian continental shelf (NCS) are maturing, and there are

consequently a great number of petroleum installations that will be decommissioned in the

near future. Decommissioning entails the full or fractional removal of an installation, and the

process normally involves high costs. Having many of the largest extraction facilities in the

world, the NCS represents the greatest share of removal costs globally.

This thesis models project value and optimal timing of abandonment for a mature field on

the NCS. The field produces both crude oil and natural gas and has an exponentially

declining production. The analyses are conducted using a net present value and a real options

approach. The real options approach is based on a contingent claims analysis, and includes

the modeling of an abandonment option through a binominal lattice. Prices of crude oil and

natural gas are modeled stochastically. Both models incorporate scenarios reflecting recent

decommissioning market trends.

Project data has been received from Statoil. The data is fictive, but based on a real case. The

ultimate purpose is to evaluate the potential value of implementing a real options model for

decommissioning analyses at Statoil. For our project, we find that the Net Present Value

Model and the Real Option Model generally yield the same optimal timing of abandonment,

but differ in project valuation. We conclude that the potential value of implementing a real

options analysis depends on field characteristics and the purpose of the analysis. In general,

the abandonment option is worth more for a field with a low decline in production compared

to a rapid decline in production.