Optimal Oil Extraction as a Multiple Real Option

Nikolay Aleksandrov and Raphael Espinoza ()

No 64, OxCarre Working Papers from Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford

Abstract: We study optimal oil extraction strategy and the value of an oil field using a multiple real option approach. Extracting a barrel of oil is similar to exercising a call option and optimal strategies lead to deferring production when oil prices are low and when volatility is high. We show that, in theory, the net present value of a country’s oil reserves is increased significantly (by 100 percent, in the most extreme case) if production decisions are made conditional on oil prices. We also show that the marginal value of additional capacity is higher for countries with bigger resources and longer production horizons. We apply the model to Brazil and the U.A.E. in order to pin down two points of the global supply curve.

Keywords: Oil production; Real Options; Capacity Expansion; Stochastic Optimization (search for similar items in EconPapers)
JEL-codes: C61 Q30 Q43 (search for similar items in EconPapers)
Date: 2011-09-12
New Economics Papers: this item is included in nep-cwa and nep-ene
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:oxf:oxcrwp:064

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