Integration of financial and strategic planning using a real options framework bolsters capital spending decisions

Strategic planning and real options theory begin with the end in mind. Both require the decision-maker to think forward through all possible and probable scenarios and options and reason backward. These approaches force an oil and gas company planning capital investments to take a long-term, strategic look into the future in order to accomplish certain objectives. Real options theory shows that public policy that reduces uncertainty encourages investment, as it helped the California State Lands Commission develop an optimum royalty rate schedule. Also, real options theory helps operators determine the best way of proceeding with a project based on the price of oil or gas and the volatilit...

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