Uncertain time to completion in a sequential investment problem: A theoretical analysis and an empirical application

Micah Lucy Abigaba, Jens Bengtsson, Martijn W. Ketelaars and Peter M. Kort

Energy Economics, 2025, vol. 149, issue C

Abstract: We develop a real options framework for a sequential oil project in which the oil company has to complete its development stage before it is able to start its production stage. Both the oil price and the duration of the development stage are uncertain. For each stage we determine the associated optimal price threshold that reflects an optimal investment timing. The goal of the article is to study the determination of these two thresholds. Because the oil price and the time to completion are uncertain, it is imperative to coordinate the thresholds in such a way that upon completion of the development stage it is sufficiently probable that the oil company can immediately start its production stage. Our numerical analysis is based on Uganda’s oil project in the Albertine Graben region. We show that changes in the characteristics of the oil price have a more pronounced effect on the development price threshold because it depends also on the production price threshold. Interestingly, we observe that it could be optimal for the oil company to start its initial development stage later in case of a shorter expected time to completion. This happens when it expects the oil price to grow relatively quickly.

Keywords: Development; Production; Real options; Uganda; Oil project (search for similar items in EconPapers)
JEL-codes: D81 G11 O13 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0140988325005201
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:149:y:2025:i:c:s0140988325005201

DOI: 10.1016/j.eneco.2025.108693

Access Statistics for this article

Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

More articles in Energy Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().