IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

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

  • Abdullah Almansour

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

  • Margaret Insley

    (Department of Economics, University of Waterloo)

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

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

in new window

Length: 43 pages
Date of creation: Jun 2013
Date of revision: Jun 2013
Handle: RePEc:wat:wpaper:1303
Contact details of provider: Postal: Waterloo, Ontario, N2L 3G1
Phone: (519) 888-4567 ext 33695
Fax: (519) 725-0530
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Eduardo Schwartz & James E. Smith, 2000. "Short-Term Variations and Long-Term Dynamics in Commodity Prices," Management Science, INFORMS, vol. 46(7), pages 893-911, July.
  2. Geman, Hélyette, 2005. "Commodities and commodity derivatives : modeling and pricing for agriculturals, metals and energy," Economics Papers from University Paris Dauphine 123456789/607, Paris Dauphine University.
  3. Stephen P. A. Brown & Mine K. Yucel, 2008. "What Drives Natural Gas Prices?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 45-60.
  4. Björk, Tomas & Landen, Camilla, 2000. "On the Term Structure of Futures and Forward Prices," SSE/EFI Working Paper Series in Economics and Finance 0417, Stockholm School of Economics, revised 20 Dec 2000.
  5. Zhuliang Chen & Peter Forsyth, 2010. "Implications of a regime-switching model on natural gas storage valuation and optimal operation," Quantitative Finance, Taylor & Francis Journals, vol. 10(2), pages 159-176.
  6. CHESNEY, Marc & LOUBERGE, Henri & VILLENEUVE, Stéphane, 2001. "Long-term risk management of nuclear waste : a real options approach," Les Cahiers de Recherche 767, HEC Paris.
  7. Serletis, Apostolos & Rangel-Ruiz, Ricardo, 2004. "Testing for common features in North American energy markets," Energy Economics, Elsevier, vol. 26(3), pages 401-414, May.
  8. Mason, Charles F., 2001. "Nonrenewable Resources with Switching Costs," Journal of Environmental Economics and Management, Elsevier, vol. 42(1), pages 65-81, July.
  9. Luis M. Abadie & José; M. Chamorro & Mikel González-Eguino, 2011. "Optimal Abandonment of EU Coal-fired Stations," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 175-208.
  10. Jean-Daniel Saphores & Eric Gravel & Jean-Thomas Bernard, 2004. "Regulation and Investment under Uncertainty: An Application to Power Grid Interconnection," Journal of Regulatory Economics, Springer, vol. 25(2), pages 169-186, 03.
  11. Lance J. Bachmeier & James M. Griffin, 2006. "Testing for Market Integration: Crude Oil, Coal, and Natural Gas," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 55-72.
  12. Schwartz, Eduardo S, 1997. " The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-73, July.
  13. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 113-47.
  14. Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," The Journal of Business, University of Chicago Press, vol. 58(2), pages 135-57, April.
  15. Conrad, Jon M. & Kotani, Koji, 2005. "When to drill? Trigger prices for the Arctic National Wildlife Refuge," Resource and Energy Economics, Elsevier, vol. 27(4), pages 273-286, November.
  16. Slade, Margaret E., 2001. "Valuing Managerial Flexibility: An Application of Real-Option Theory to Mining Investments," Journal of Environmental Economics and Management, Elsevier, vol. 41(2), pages 193-233, March.
  17. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," University of California at Los Angeles, Anderson Graduate School of Management qt43n1k4jb, Anderson Graduate School of Management, UCLA.
  18. Peter R. Hartley & Kenneth B Medlock III & Jennifer E. Rosthal, 2008. "The Relationship of Natural Gas to Oil Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 47-66.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:wat:wpaper:1303. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Pat Gruber)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.