Evaluation of Oil Sands Projects and their Expansion Rate using Real Options

The rapidly expanding oil sands of western Canada, the third largest reserves in the world, are creating serious challenges, such as ecological harm, labour shortages, and extensive natural gas consumption. This thesis develops three practical real options models to evaluate the feasibility of oil sands projects and to stimate the optimal rate of oil sands expansion, while accounting for the stated concerns. The first model estimates the value of an oil sands plant, while accounting for oil price uncertainty, in a single-agent setting. The model shows that, in the current bullish oil market and with the long life of oil sands projects, once constructed, oil sands plants are highly unlikely to close unless the price of oil drops substantially. Unsanctioned projects with little capital spentare susceptible to delay/cancellation. The second model estimates the value of a plant, while accounting for oil and natural gas price uncertainties, in a single-agent setting. The results show that oil price is the key driver of oil sands growth in Alberta. Becauseof the current low natural gas price, the importance of natural gas price uncertainty in the valuation is low. The third model evaluates the rate of oil sands expansion under different environmental tax/cost policies, while accounting for the oil price uncertainty,in a multi-agent setting . This model also accounts for labour shortages in Alberta. The results show that a stricter environmental tax policy delays investment but leads to a higher rate of expansion once investment begins. The first two models provide a framework for oil companies to value new oil sands plants and to gauge the optimum time to construct, given the current state of uncertainty in the industry. The third model allows oil companies and government policy makers to gauge the impact of policy strategies on oil sands expansion rates.Ph.D