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The impact of stochastic extraction cost on the value of an exhaustible resource: An application to the Alberta oil sands

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  • Abdullah Almansour

    (Department of Finance and Economics, King Fahd University of Petroleum and Minerals)

  • Margaret Insley

    (Department of Economics, University of Waterloo)

Abstract

The optimal management of a non-renewable resource extraction project is studied when input and output prices follow correlated stochastic processes. The decision problem is specified by two Bellman equations describing the project when it is currently operating or mothballed. Solutions are determined numerically using the Least Squares Monte Carlo methodology. The analysis is applied to an oil sands project which uses natural gas during extracting and upgrading. The paper takes into account the co-movement between crude oil and natural gas prices and proposes two price models: one incorporates a long-run link between the two while the other has no such link. Incorporating a long-run relationship between oil and natural gas prices has a significant effect on the value of the project and its optimal operation and reduces the sensitivity of the project to the natural gas price process.

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Bibliographic Info

Paper provided by University of Waterloo, Department of Economics in its series Working Papers with number 1303.

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Length: 43 pages
Date of creation: Jun 2013
Date of revision: Jun 2013
Handle: RePEc:wat:wpaper:1303

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Cited by:
  1. Margaret Insley, 2013. "On the timing of non-renewable resource extraction with regime switching prices: an optimal stochastic control approach," Working Papers 1302, University of Waterloo, Department of Economics, revised Aug 2013.

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