Abstract: The traditional method to solve the investment decision of petroleum exploration projects is cash flow discount method. However, such methods ignore the importance of the irreversibility, uncertainty and the interaction between timing and quality, which may lead to short-sighted investment or poor decision-making. Considering the irreversibility, stages and uncertainties of petroleum exploration investments, combining the uncertainty of market demand and exploration reserves, the stochastic dynamic change of the transfer price of exploration reserves is obtained. Based on the sequential investment decision method, the optimal investment timing of petroleum exploration is derived, and the critical values of analytical solutions to the optimal investment timing are obtained. In addition, they are compared with the one-time investment decision-making results, and the influences of uncertainty parameters on optimal investment timing are discussed. The main contributions are as follows. (1)The critical values of the optimal investment timing for each stage of the oil exploration sequential investments are mainly due to such uncertainties as risk-free interest rates, unit exploration cost, market volatility, market drift rates, the prospectors' ability to control over the transfer price of exploration reserves, and the additional exploration reserves at each stage.(2)Sequential investment decision model can make up for the shortcomings of one-time investment which is easy to miss the investment opportunities.(3)The optimal investment timing is positively correlated with the fluctuation of market volatility and prospectors' ability to control over the transfer price of exploration reserves, and negatively correlated with the market drift rates. (4)With the development of the exploration process, the sensitivity of the optimal exploration investment timing to the parameters above is increasing. This paper can enrich and expand the application of real options theory in the investment decision-making of petroleum resource exploration projects, and provide some theoretical basis and decision-making reference for the optimal timing of the sequential investment of exploration.

Key words: petroleum exploration projects, sequential investment, the transfer price of exploration reserves, optimal investment timing, real options