The impact of stochastic extraction cost on the value of an exhaustible resource: An application to the Alberta oil sands
AbstractThe 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 InfoPaper provided by University of Waterloo, Department of Economics in its series Working Papers with number 1303.
Length: 43 pages
Date of creation: Jun 2013
Date of revision: Jun 2013
Find related papers by JEL classification:
- Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General
- Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-09-13 (All new papers)
- NEP-CMP-2013-09-13 (Computational Economics)
- NEP-ENE-2013-09-13 (Energy Economics)
- NEP-ENV-2013-09-13 (Environmental Economics)
- NEP-ORE-2013-09-13 (Operations Research)
- NEP-PPM-2013-09-13 (Project, Program & Portfolio Management)
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