# 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  
4.1 The Impact of Geological Condition on Choices of Optimal Investment Timing and Scale in Oil Projects  
This Section examines the impact of the geological condition of oil resource investees on the choices of optimal investment timing and scale. In this model, geological condition, which relates to the project revenue and irreversible capital investment, is reflected by oil production decline rate and regional calibration factor. Different areas have different oil production decline rates. The International Energy Agency (IEA) survey indicates that the oil production decline rate is different from region to region, with the rate of developed oilfields in Middle East having the lowest level and OECD countries having the highest level [58]. The oil production decline rate in the case of Section 4.2 has been used as the business as usual scenario (BAU). In this part, high oil production decline rate scenario (HDR) and low oil production decline rate scenario (LDR) are set as plus 10% and minus 10% of the initial oil production decline rate level, respectively. In Figure 2, we show the critical oil price and its corresponding value of oil project for different oil production decline rates. As oil production decline rate increases, the critical oil price increases and the oil project value decreases. However, the changes in critical oil price are small, so the oil production decline rate affects the investment threshold finitely. Regional calibration factor reflects the required investment amount for unit oil production in the region. The higher the regional calibration factor, the worse is the geological condition of the oil resource investee. Equation (26) shows that the regional calibration factor does not influence the critical oil price. However, the regional calibration factor affects the investment costs and influences the choice of investment scale. The regional calibration factor in the case of Section 4.2 has been used as the business as usual scenario (BAU). In this part, high regional calibration factor scenario (HRF) and low regional calibration factor scenario (LRF) are set as plus 10% and minus 10% of the initial regional calibration factor, respectively. When the oil price is equal to the critical oil price, Figure 3 shows that the lower scenario enlarges the investment cost of the oil project and increases its value, although these values do not change much. This means that international oil companies should enlarge their investment scale in the region that has low regional calibration factor. In other words, higher quality of oilfield allows oil companies to increase their investment. Therefore, when international oil companies make overseas investment decisions, the investment timing in each oil resource investee is roughly the same. Considering the irreversible capital investment and project revenue, investment scale should be selected according to the different geological conditions of each country. Figure 3: Oil project value for different regional calibration factor scenario (\(P=P^{*}\)). Figure 2: Oil project value and option value for different oil production decline rate scenario. 4.2 The Impact of Contract Period and Tax Holiday on the Choices of Optimal Investment Timing and Scale in Oil Projects  
Changing the length of contract period affects the oil project value and option value. The contract period in the case of Section 4.2 has been used as the business as usual scenario (BAU). In this part, the long length of contract period scenario (LCP) and short length of contract period scenario (SCP) are set as plus 10% and minus 10% of the initial length of contract period level, respectively. Figure 4 shows that extending the length increases the oil project value and option value but decreases the critical oil price. Delaying investment decisions is appropriate when the length of contract period is extended.