How and Why Petroleum Leases Are Held by Production: Analysis of a Compound Option

James Smith

Land Economics, 2018, vol. 94, issue 1, 52-72

Abstract: Most oil and gas leases allow the operator to extend possession by establishing production in paying quantities. We show how this option to “hold by production” (HBP) stimulates the drilling of many uneconomic wells but also creates incentives to delay other economic wells. We provide a simple method to value the HBP provision as a compound option and estimate that it has increased the value of typical shale gas leases in the major U.S. basins by 25% to 250% in recent years. We also identify subbasins where drilling appears likely to have been suppressed rather than stimulated.

JEL-codes: D81 Q33 (search for similar items in EconPapers)
Date: 2018
Note: DOI: 10.3368/le.94.1.52
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Citations: View citations in EconPapers (2)

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