<abstract xmlns="http://www.w3.org/1999/xhtml"><p> Over the past few years the global oil and gas industry has been going through a severe market downturn. Despite recent signs of stabilization, oil prices have a long history marked by volatility. In this context, it is imperative for oil companies to optimize their capital allocation, as this might support risk mitigation. The purpose of this paper is to offer a tool that might support the strategic decision-making process for companies operating in the oil industry. Our model uses Markowitz’ portfolio selection theory to construct the efficient frontier for currently producing fields and a set of investment projects. These relate to oil and gas exploration projects and projects aimed at enhancing current production. The net present value is obtained for each project under a set of usersupplied scenarios. For the base-case scenario we also model oil prices through Monte Carlo simulation. We run the model for a combination of portfolio items which include both currently producing assets and new exploration projects, using data characteristics of a mature region with a high number of low-production fields. Our objective is to find the vector of weights (equity stake in each project) which minimizes portfolio risk, given a set of expected portfolio returns. The model is of particular interest for companies operating in Eastern Europe, or in any other mature region. It can also support divestment and acquisition decisions since these may place the company’s portfolio closer or farther away from the efficient frontier. The model is highly versatile and can be implemented on any software with an optimization package such as Microsoft Excel.</p></abstract>

Over the past few years the global oil and gas industry has been going through a severe market downturn. Despite recent signs of stabilization, oil prices have a long history marked by volatility. In this context, it is imperative for oil companies to optimize their capital allocation, as this might support risk mitigation. The purpose of this paper is to offer a tool that might support the strategic decision-making process for companies operating in the oil industry. Our model uses Markowitz’ portfolio selection theory to construct the efficient frontier for currently producing fields and a set of investment projects. These relate to oil and gas exploration projects and projects aimed at enhancing current production. The net present value is obtained for each project under a set of usersupplied scenarios. For the base-case scenario we also model oil prices through Monte Carlo simulation. We run the model for a combination of portfolio items which include both currently producing assets and new exploration projects, using data characteristics of a mature region with a high number of low-production fields. Our objective is to find the vector of weights (equity stake in each project) which minimizes portfolio risk, given a set of expected portfolio returns. The model is of particular interest for companies operating in Eastern Europe, or in any other mature region. It can also support divestment and acquisition decisions since these may place the company’s portfolio closer or farther away from the efficient frontier. The model is highly versatile and can be implemented on any software with an optimization package such as Microsoft Excel.

A portfolio optimization model for a large number of hydrocarbon exploration projects

Proceedings of the International Conference on Business Excellence

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Over the past few years the global oil and gas industry has been going through a severe market downturn. Despite recent signs of stabilization, oil prices have...

A portfolio optimization model for a large number of hydrocarbon exploration projects

Published Online: Jun 15, 2018

Page range: 171 - 181

DOI: https://doi.org/10.2478/picbe-2018-0017

Keywords
portfolio management, optimization, petroleum industry, efficient frontier, Monte Carlo simulation

© 2018 Vlad-Cosmin Bulai, published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

A portfolio optimization model for a large number of hydrocarbon exploration projects

Published Online: Jun 15, 2018

Page range: 171 - 181

DOI: https://doi.org/10.2478/picbe-2018-0017

Keywordsportfolio management, optimization, petroleum industry, efficient frontier, Monte Carlo simulation

© 2018 Vlad-Cosmin Bulai, published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Keywords
portfolio management, optimization, petroleum industry, efficient frontier, Monte Carlo simulation