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Uncertain time to completion in a sequential investment problem: A theoretical analysis and an empirical application

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  • Abigaba, Micah Lucy
  • Bengtsson, Jens
  • Ketelaars, Martijn W.
  • Kort, Peter M.

Abstract

We develop a real options framework for a sequential oil project in which the oil company has to complete its development stage before it is able to start its production stage. Both the oil price and the duration of the development stage are uncertain. For each stage we determine the associated optimal price threshold that reflects an optimal investment timing. The goal of the article is to study the determination of these two thresholds. Because the oil price and the time to completion are uncertain, it is imperative to coordinate the thresholds in such a way that upon completion of the development stage it is sufficiently probable that the oil company can immediately start its production stage. Our numerical analysis is based on Uganda’s oil project in the Albertine Graben region. We show that changes in the characteristics of the oil price have a more pronounced effect on the development price threshold because it depends also on the production price threshold. Interestingly, we observe that it could be optimal for the oil company to start its initial development stage later in case of a shorter expected time to completion. This happens when it expects the oil price to grow relatively quickly.

Suggested Citation

  • Abigaba, Micah Lucy & Bengtsson, Jens & Ketelaars, Martijn W. & Kort, Peter M., 2025. "Uncertain time to completion in a sequential investment problem: A theoretical analysis and an empirical application," Energy Economics, Elsevier, vol. 149(C).
    • Handle: RePEc:eee:eneeco:v:149:y:2025:i:c:s0140988325005201
    DOI: 10.1016/j.eneco.2025.108693
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products

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