Download This PaperThe Option to Drill Again: Valuing a Sequence of Dependent Trials
17 Pages Posted: 8 Jan 2003
Date Written: October 23, 2002
Abstract
We examine the value of a petroleum exploration prospect that is to be exploited via a series of possibly dependent trials. The pattern and strength of dependence among trials is linked to a real option that affects the expected economic value of the prospect. We develop an exact, yet intuitive, expression for the expected value of such a prospect. We also show that two intuitive approaches to valuation provide strict upper and lower bounds for the actual value. Finally, the impact of dependence is shown to be monotonic: each increase in the degree of dependence among trials results in a further reduction in expected value of the prospect.
Keywords: Real option, valuation, oil, exploration
JEL Classification: G12, G31, Q40, D83
Suggested Citation: Suggested Citation