Publications

Whenever the Government opens the tender process for new PSC blocks, it is the governments expectation that the contractor begins immediate investment in exploration activities and start exploitation soon after confirming commercia reserves. Ultimately, it is the governments intention to maximize the revenue derived from these tender blocks for the greater benefit of Indonesia. In terms of investment decisions, the primary difference between traditional net present values (NPV) analysis and real options analysis is the timing of the investment. NPV analysis suggests that the investment opportunity is “now or never. Simply, make the investment now and the NPV is positive. But most investments are not “now or never, and in these cases an NPV greater than zero is not sufficient for immediate investment. The option pricing theory tells us that immediate investment is not optimal unless well head prices are higher than the threshold price. The objective of this paper is to examine how Real Options Analysis can help both the government and the contractor in analyzing the potential of undeveloped reserves. This paper extends a model by Paddock, Siegel, and Smith (1988) to value undeveloped reserves in the Indonesian PSC regime. This paper makes the conclusion that the Real Options (RO) can be applied to the Indonesian PSC regime to value undeveloped reserves in Indonesia. The RO is more likely to reveal the real picture with regard to the value of potential exploration and the subsequent value of undeveloped reserves in Indonesia than any other currently available technique. Consequently, it has the potential to develop into a better basis for the negotiation of contract terms between the contractor and the Government of Indonesia. This in turn will allow for greater stimulation in the development of undeveloped reserves in Indonesia.