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The Option Value of Acquiring Information in an Oilfield Production Enhancement Project

The Option Value of Acquiring Information in an Oilfield Production Enhancement Project In many industrial applications, the option to acquire information instead of simply waiting for conditions to improve can add considerable value to projects. As one example, most oil wells require periodic “workovers” to maintain production at satisfactory levels, and acquiring up‐to‐date information on the reservoir using a production logging tool (PLT) generally improves the efficiency of such workovers. This article presents a case study of oil production enhancement in which Bayesian analysis is incorporated into a real options framework to determine whether the additional cost of acquiring information is justified. This case is different from most applications of real options in that there are two main sources of uncertainty: the oil price and the reservoir. Bayesian analysis was used to update the reservoir model, using the PLT data together with prior knowledge about the reservoir. The updated reservoir model was then incorporated into a real options valuation framework. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Applied Corporate Finance Wiley

The Option Value of Acquiring Information in an Oilfield Production Enhancement Project

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Publisher
Wiley
Copyright
Copyright © 2005 Wiley Subscription Services, Inc., A Wiley Company
ISSN
1078-1196
eISSN
1745-6622
DOI
10.1111/j.1745-6622.2005.00037.x
Publisher site
See Article on Publisher Site

Abstract

In many industrial applications, the option to acquire information instead of simply waiting for conditions to improve can add considerable value to projects. As one example, most oil wells require periodic “workovers” to maintain production at satisfactory levels, and acquiring up‐to‐date information on the reservoir using a production logging tool (PLT) generally improves the efficiency of such workovers. This article presents a case study of oil production enhancement in which Bayesian analysis is incorporated into a real options framework to determine whether the additional cost of acquiring information is justified. This case is different from most applications of real options in that there are two main sources of uncertainty: the oil price and the reservoir. Bayesian analysis was used to update the reservoir model, using the PLT data together with prior knowledge about the reservoir. The updated reservoir model was then incorporated into a real options valuation framework.

Journal

Journal of Applied Corporate FinanceWiley

Published: Mar 1, 2005

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