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A Dynamic Model Of Cleanup: Estimating Sunk Costs In Oil And Gas Production

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  • Lucija Muehlenbachs

Abstract

The environmental remediation required to permanently decommission most industrial projects is an expensive, irreversible investment. Real options literature shows that temporary closure has value under uncertainty. However, even if there is no intention to restart operations, there is an incentive to label a closure as “temporary” to avoid having to remediate ongoing or future environmental externalities. I estimate a dynamic discrete choice model of closure under price and quantity uncertainty to evaluate the likelihood of reactivation. The model reveals that the option to temporarily close is being widely used to avoid environmental remediation of oil and gas wells in Canada.

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  • Lucija Muehlenbachs, 2015. "A Dynamic Model Of Cleanup: Estimating Sunk Costs In Oil And Gas Production," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56(1), pages 155-185, February.
    • Handle: RePEc:wly:iecrev:v:56:y:2015:i:1:p:155-185
    DOI: 10.1111/iere.12098
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