# Optimal Investment Timing and Scale Choice of Overseas Oil Projects: A Real Option Approach
## 2 Literature Review
Based on the deficiencies in the nonlinear programming model and fluctuation in oil prices and exchange rates, real option approach can be used to study the choice of investment scale of oil projects, taking full account of uncertainty and management flexibility. Under the consideration of risk from oil prices and exchange rates, international oil companies can use the real option approach to evaluate the value of oil projects and make optimal investment decisions. However, the literature on the choice of investment scale in oil projects have rarely used the real option approach and do not consider the investment timing, which reduces the value of management flexibility. [PERSON] [30], for example, allowed oilfield investment scale to change freely under different tax regimes and used real option approach to study the impact of taxes on investment scale. [PERSON] and [PERSON] [31] applied [PERSON]'s approach to rank tax distortion of several international tax regimes. The timing of investment, however, remained fixed in these researches. [PERSON] et al. [32] studied optimal strategies for oilfield exploitation by real option approach, considering the size of the reserves and the variation in the oil price as uncertainties. [PERSON] et al. [33] applied real options theory and Monte Carlo simulation to study overseas oil investment evaluation incorporating various uncertainties. The model aimed to value overseas oil investment projects under different resource tax systems and distinct oilfield sizes. In previous studies, the fixed investment scale or investment timing limited the flexibility of a firm's investment decisions on an uncertain environment. To fully consider the uncertainty and management flexibility, it would be ideal to select both optimal timing and scale of investment in order to obtain the optimal investment decisions in oil projects. Applying the real option approach, [PERSON] et al. [34] evaluated the investment option value and considered discrete production scale. Considering the uncertainties and optimal timing, [PERSON] and [PERSON] [35] focused on the investment proportion in two stages and presented a two-stage investment model. However, the total scale was fixed in this theoretical model. It is worth noting that a few distinct investment scales have limited its application in practice for international oil companies. [PERSON] et al. [36], [PERSON] et al. [37], and [PERSON] et al. [38] presented a method for evaluating renewable energy projects that were subject to uncertainties (electricity price and policy). Considering logistics demand volatility, [PERSON] et al. [39] evaluated a logistics park investment, which aimed to determine the choice of optimal timing and size. These researchers presented a real options-based method with continuous timing and scaling In particular, this continuous scaling selection method fully considered the uncertain environment and value of management flexibility. In addition, renewable energy projects, like overseas oil projects, are also irreversible capital investments. Using such a method can help international oil companies make their own optimal investment decisions on overseas oil projects that are more suitable for current practice. According to the relevant studies, the new evaluation model should combine a few significant decision options (timing and scale of investment) and uncertainty factors (oil price and US dollar exchange rate). The variable investment cost can enlarge the flexibility of decision-making. Therefore, in this paper, we construct a real option model that can determine the optimal investment timing and scale of overseas oil projects under the condition that the current oil price shows a downward trend and fluctuates greatly. For large-scale irreversible investment, considering both optimal investment timing and scale, this model can take full account of the value of management flexibility, which can give international oil companies more accurate and practical policy implications.