INVESTMENT DECISIONS IN AN OIL REFINERY IN BRAZIL UNDER A REAL OPTION APPROACH

Goal: The objective of this article is twofold: (i) analyze the investment in a new refinery in Brazil and identify the optimal moment to invest; and (ii) model the crack spread adjusted to the Brazilian market. Design / Methodology / Approach: The main uncertainties given by the crack spread and the foreign exchange rate were modeled as a continuous mean reversion model and geometric Brownian motion, respectively. The project was valued based on a real-option approach, including the option to postpone and the option to temporarily shut down. The first was assessed from analytical solution of the differential equation, while the latter was obtained from Monte Carlo simulation. Results: The investment decision changes depending on the expiration date of the postponement option and the stochastic treatment of the initial investment. The temporary shutdown option increases the value of the refinery and may change the decision of postponement. Limitations of the investigation: The crack spread was modeled based on international market because of limited availability of data from the Brazilian market. Additionally, results are dependent on the uncertainties and flexibilities modeled. Practical implications: The analysis comprising both options is especially relevant because there are refinery projects discontinued in Brazil, and the country is an oil products' importer. Originality / Value: The paper contributes with an analysis in the refining industry considering the optimal moment to invest based on the interaction of two different options. Especially original is the crack spread modeling adapted to the Brazilian market.