# Optimal Investment Timing and Scale Choice of Overseas Oil Projects: A Real Option Approach
## 4 Model Application: Case Project Results and Discussion
### Influence Factors Analysis of Investment Strategy
However, changing the length of contract period to a certain degree does not significantly influence the investment timing of oil projects and has limited effect on investment decisions. Next, the effect of tax holiday will be discussed by empirical analysis. Based on the theoretical analysis in Section 3.5 and parameters in Section 4.1, the calculation results of the case project are presented under the existence of tax holiday (See Table 3). Compared with the case results in Section 4.2, it can be seen that the existence of tax holiday do not affect the choice of the oilfield recovery factor. This means that the existence of the term does not affect the choice of investment scale. However, the existence of tax holiday will allow international oil companies to reduce the investment threshold and start investment at a lower oil price. The existence of this term can offset the burden of taxation for investors to some extent and increase the oil project value. Sunk costs are mainly determined by unit operation cost and investment costs and do not directly relate to the taxation system, so the optimal investment scale does not change. Therefore, paying attention to negotiation for tax holiday in the era of low oil prices is important because it can enable international oil companies to reduce the investment threshold and start investment at lower levels of oil price. Figure 4: Oil project value and option value for different length of contract period scenario. \begin{table}
\begin{tabular}{l c c} \hline \hline
**Variable** & **No Existence of Tax Holiday** & **Existence of Tax Holiday** \\ \hline Oil project value (\(\times 10^{9}\) USS) & 0.969 & 0.969 \\ Tax revenue of government (\(\times 10^{9}\) USS) & 1.504 & 1.267 \\ Critical recovery factor \(s^{*}\) (\%) & 27.47 & 27.47 \\ Critical oil price P\({}^{*}\) (USS/bbl) & 82.32 & 76.23 \\ Critical unit revenue \(\theta^{*}\) (USS/bbl) & 45.27 & 41.93 \\ \hline \hline \end{tabular}
\end{table} 
Table 3: Case results about tax holiday. 4.3 The Impact of Unit Operation Cost on the Choices of Optimal Investment Timing and Scale in Oil Projects  
Unit operation cost directly relate to the emission policy charges and technology of management and production. The unit environment cost and unit production cost in the case of Section 4.2 has been used as the business as usual scenario (BAU). In this part, high environment cost scenario (HEC) and low production cost scenario (LPC) are set as plus 1.5 \(\$\)/bbl and minus 1.5 \(\$\)/bbl of the initial unit operation cost level, respectively. Based on the case project in Section 4.2, Figure 5 shows the impact of unit operation cost on the critical oil price and optimal investment scale. It is clear that reducing unit production cost can reasonably decrease critical oil price and increase oil project value. Compared to previous analysis of geological condition and length of contract period, the change in unit operation cost greatly affects the critical oil price. Considering the optimal investment timing, the reduction of unit operation cost enables international oil companies to significantly reduce their critical oil price, which allows them to reduce the investment threshold and start investment decisions at relatively low levels of oil price. The results also imply that technical progress regarding reducing unit operation cost is important for international oil companies. In addition, they indicate that increasing environment cost obviously affects the optimal investment decision and oil project value. In the background of global climate change, different environmental costs obviously alter the investment threshold. In the future, more and more emission reduction policies will be promoted in every country in order to guarantee development sustainability. Therefore, it is important for investors to consider the pressure of environmental constrain in the investee country, which in turn influences the investment decision.