Quantifying exploration back-in options using DCF method undervalues asset

Most upstream petroleum contracts provide for host countries to hold back-in rights to acquire an equity participation in resulting commercial discoveries at no exploration risk.For reasons not arguable within the scope of this article, many oil-rich or potentially oil-rich countries' governments are cash strapped. Their cash situation could be alleviated by way of monetizing their back-in rights.This would involve selling their rights to private investors (preferably small independent oil companies). The effective value of the deal between the oil company and the host country is determined through bargaining or via a tender. An important issue is how to value the exploration back-in ...

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