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Geology or Economics? Testing Models of Irreversible Investment Using North Sea Oil Data

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  • Hurn, A S
  • Wright, Robert E

Abstract

This paper tests the main implications of models of irreversible investment using data from operations in the oil fields in the North Sea. Discrete-time hazard regression models are used to ascertain the influence of economic variables, the expected price of oil, the variance of the price of oil and the level of reserves, on the lag between the discovery of a field and the decision to develop the field. We are able to control for heterogeneity in the data by incorporating variables which account for both the geological features of each field and individual operator characteristics. The results indicate that the expected price of oil and the level of reserves are important in influencing the appraisal duration but that the variance of the oil price is not. Variables capturing the non-economic features of the individual fields are also found to be significant factors affecting the appraisal lag. Copyright 1994 by Royal Economic Society.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 104 (1994)
Issue (Month): 423 (March)
Pages: 363-71

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Handle: RePEc:ecj:econjl:v:104:y:1994:i:423:p:363-71

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Cited by:
  1. Laarni Bulan & Christopher J. Mayer & C. Tsuriel Somerville, 2006. "Irreversible Investment, Real Options, and Competition: Evidence from Real Estate Development," NBER Working Papers 12486, National Bureau of Economic Research, Inc.
  2. Christopher F. Baum & Mustafa Caglayan & Oleksandr Talavera, 2006. "Firm Investment and Financial Frictions," Discussion Papers of DIW Berlin 634, DIW Berlin, German Institute for Economic Research.
  3. Mohn, Klaus & Misund, Bård, 2009. "Investment and uncertainty in the international oil and gas industry," Energy Economics, Elsevier, vol. 31(2), pages 240-248, March.
  4. Christopher F. Baum & Mustafa Caglayan & Oleksandr Talavera, 2010. "On the sensitivity of firms' investment to cash flow and uncertainty," Oxford Economic Papers, Oxford University Press, vol. 62(2), pages 286-306, April.
  5. Alan Carruth & Andy Dickerson & Andrew Henley, 1998. "What Do We Know About Investment Under Uncertainty?," Studies in Economics 9804, Department of Economics, University of Kent.
  6. Jean-Pierre Ponssard & Catherine Thomas, 2010. "Capacity Investment under Demand Uncertainty. An Empirical Study of the US Cement Industry, 1994‐2006," Working Papers hal-00511563, HAL.
  7. Mark J. Koetse & Henri L.F. de Groot & Raymond J.G.M. Florax, 2006. "The Impact of Uncertainty on Investment: A Meta-Analysis," Tinbergen Institute Discussion Papers 06-060/3, Tinbergen Institute.
  8. Timothy Dunne & Xiaoyi Mu, 2008. "Investment spikes and uncertainty in the petroleum refining industry," Working Paper 0805, Federal Reserve Bank of Cleveland.
  9. Klaus Mohn & Petter Osmundsen, 2011. "Asymmetry and uncertainty in capital formation: an application to oil investment," Applied Economics, Taylor and Francis Journals, vol. 43(28), pages 4387-4401.
  10. Odening, Martin & Musshoff, Oliver & Huettel, Silke, 2003. "Empirische Validierung von Realoptionsmodellen," Working Paper Series 18825, Humboldt University Berlin, Department Agricultural Economics.
  11. Mohn, Klaus & Misund, Bård, 2008. "Shifting sentiments in Firm Investment: An Application to the Oil Industry," UiS Working Papers in Economics and Finance 2009/12, University of Stavanger.
  12. Bulan, Laarni T., 2005. "Real options, irreversible investment and firm uncertainty: New evidence from U.S. firms," Review of Financial Economics, Elsevier, vol. 14(3-4), pages 255-279.
  13. Li, Yong & James, Barclay & Madhavan, Ravi & Mahoney, Joseph T., 2006. "Real Options: Taking Stock and Looking Ahead," Working Papers 06-0114, University of Illinois at Urbana-Champaign, College of Business.
  14. Muehlenbachs, Lucija, 2012. "Testing for Avoidance of Environmental Obligations," Discussion Papers dp-12-12, Resources For the Future.

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