# Optimal Investment Timing and Scale Choice of Overseas Oil Projects: A Real Option Approach
## 1 Introduction  
From 2008 to 2017, international oil prices have declined and fluctuated. The upstream oil investment will obviously decrease if the low levels of oil price are sustained [1]. For example, mining and exploration investment, which reflects petroleum exploration and development, declined 35% in 2015, the second largest year-over-year decline since the U.S. Bureau of Economic Analysis (BEA) began reporting the series in 1948 [2]. In the era of low oil prices, many international oil companies, in an effort to avoid greater losses, have suspended upstream investment, stopped new oilfield construction, and waited for the recovery of oil prices.  
Compared with domestic oil projects, overseas projects are an ideal way for oil companies as it helps them to continuously expand for survival and seek international profits [3]. As a result, oil companies are willing to seek investment opportunities for overseas projects. However, it shouldbe noted that overseas oil projects are more complex because they contain risks of changes in policy and uncertainties of economic factors [4]. For international oil companies, the choices of optimal investment timing and scale are key aspects in overseas oil projects because of oil price fluctuation and heavy sunk cost. Investment decisions made at an inappropriate time can cause significant losses in the value of oil projects. Furthermore, the investment scale choice of oil projects is equally important under uncertainty. On the one hand, expanding investment scale can enable companies to increase their oil production and make it possible to obtain more benefits in the future. On the other hand, this may lead to large sunk costs and force companies to bear greater losses in the era of low oil prices. Based on the current situation, this article explores two issues from the perspective of overseas oil projects: (1) the critical oil price, which can be seen as the investment threshold for triggering oilfield development and (2) optimal recoverable factor for every oil price level, which indicates the optimal investment scale.  
Under highly uncertain environment, oil projects with management flexibility have irreversible capital investment within a long project period. Discounted cash flow method (DCF), the major technology of project valuation, has disadvantages because it cannot capture the value of management flexibility. The real option approach, one of the most important option pricing methods in irreversible capital investment evaluation, can help investors to value oil projects correctly [5]. The real option approach introduces the concept of \"option\", and its purpose is to consider the value of management flexibility from the uncertainties in oil prices and exchange rates and explain \"how firms should make decisions about investments that involve sunk cost\" [6].  
Therefore, under the current background of oil price and US dollar exchange rate, the purpose of this article is to build a real option model that can determine the optimal investment timing and scale of overseas oil projects. The real option model combines a few significant decision options (timing and scale of investment) and uncertainty factors (oil price and US dollar exchange rate). At the same time, the article demonstrates the impact of investment scale on investment timing in oil projects. In addition, the influence factors analysis of investment strategy can be attained based on this model.  
The remaining article proceeds as follows: Section 2 makes a literature review. Section 3 describes the model of this article. Section 4 presents a case project and analyzes the results; it also focuses on demonstrating the impact of investment scale on investment timing. Finally, the conclusion and policy implications for overseas oil projects are provided in the last section.