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Abstract:
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This report offers a comparative valuation of two bitumen production technologies , using real options analysis (ROA ) techniques to incorporate strategic flexibility into the investment scenario . By integrating a probabilistic cost model into a real options framework , the value of an oil recovery facility is modeled to reflect the realistic alternatives available to decision -makers , where the course of the investment can be altered as new information becomes available . This approach represents a distinct advantage to traditional discounted cash flow (DCF ) estimation , which is unable to capture operational adaptability , including the ability to expand , delay , or abandon a project .
The analysis focuses on the energy inputs required for the recovery of heavy oil bitumen from Alberta , Canada , and examines both natural gas and nuclear steam plants as heat sources . The ACR -1000 reactor is highlighted as a substitute for conventional natural gas -fueled means of production , in light of the recent volatility of natural gas prices and the potential for emissions compliance charges . The methodology includes a levelized cost assessment per barrel of bitumen and estimation of cost ranges for each component . A mean -reversion stochastic price model was also derived for the both natural gas and oil price .
By incorporating cost ranges into a ROA framework , the benefit of retaining project flexibility is included in its valuation . Formulated as a decision tree , built -in options include the initial selection to pursue nuclear or natural gas , site selection and licensing , the ability to switch heat source in the planning stage , and the final commitment to construct . Each decision is influenced by uncertainties , including the course of bitumen and natural gas price , as well as emissions policy . By structuring the investment scenario to include these options , the overall value of the project increases by over $150 million . The ability to switch technology type allows for an assessment of the viability of nuclear steam , which becomes economically favorable given high natural gas prices or high emissions taxes . Given an initial selection of natural gas SAGD , there is a 25 % probability that a switch to nuclear steam will occur , as evolving financial conditions make nuclear the optimal technology . |