Evaluation of a Joint Investment in an Industrial Cluster using Real Options - A Study on an integrated utility system investment in the chemical cluster in Stenungsund

Abstract: A Real Option Analysis is performed on the investment of an integrated utility system within a chemical cluster in Stenungsund, Sweden. The utility system investment is an energy saving investment where the revenues arise due to decreased import of natural gas used as fuel in boilers. Even though the sys- tem reduces the combustion of natural gas and hence the CO2 emissions, no investment decision has yet been taken. The hold up for the investment is cooperation and risk handling issues between the companies in the cluster. To overcome these challenges, the thesis analyses investment data and identi- es a project structure with the involvement of as few companies as possible in the beginning of the project. Thus the project complexity is decreased. The structure results in a base investment with two independent expansions. Available options are identi ed from the project structure. The real options are valued using the binomial lattice model. Two distinct investment scenarios are identi ed, expansion and delay. The value- and de- cision trees for the two scenarios and a combined scenario are presented and analysed. The expansion scenario is found to be 36% more pro table than the delay scenario. The delay scenario on the other hand delays one third of the base investment. Hence the companies are given the possibility to only invest partly and evaluate the cooperation before making decisions of the nal investments. A sensitivity analysis is performed by investigating the impact of uncer- tainties on the real option value. The real option value is most sensitive to the natural gas price and the hurdle rate. External uncertainties motivates the further investigation of the sensitivity to the natural gas price. Random walk simulations on the two scenarios are performed to estimate the distribution of the project value. The project value is larger than the investment cost with 87% probability for the expansion scenario and 82% probability for the delay scenario.