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Petroleum Concessions with Extendible Options: Investment Timing and Value Using Mean Reversion and Jump Processes for Oil Prices

Institute for Applied Economic Research Working Paper No. 620

41 Pages Posted: 19 Apr 1999  

Marco Antonio Guimarães Dias

Petrobras/E&P/Gerer/Corfex

Katia Rocha

IPEA-Institute for Applied Economic Research of the Brazilian Government

Date Written: January 1999

Abstract

The owner of a petroleum exploration concession in Brazil has an investment option until the expiration date fixed by the governmental agency, which can be extended by additional cost. The value of these rights and the optimal investment timing are calculated by solving a stochastic optimal control problem of an American call option with extendible maturities.

The uncertainty of the oil prices is modeled as a mix fusion-jump process. Normal information arrival generates continuous mean-reverting process for oil prices, whereas a random abnormal information generates a discrete jump of random size. Comparisons are performed with the popular geometric Brownian process and also the quantification and analysis of alternative timing policies for the petroleum sector.

JEL Classification: Q4, L7, E3

Suggested Citation

Guimarães Dias, Marco Antonio and Rocha, Katia, Petroleum Concessions with Extendible Options: Investment Timing and Value Using Mean Reversion and Jump Processes for Oil Prices (January 1999). Institute for Applied Economic Research Working Paper No. 620. Available at SSRN: https://ssrn.com/abstract=159692 or http://dx.doi.org/10.2139/ssrn.159692

Marco Antonio Guimarães Dias

Petrobras/E&P/Gerer/Corfex ( email )

Av. Chile 65, sala 1701-C
Centro
Rio de Janeiro, RJ 20035-9
Brazil
55 21 5342164 (Phone)
55 21 5341579 (Fax)

Katia Rocha (Contact Author)

IPEA-Institute for Applied Economic Research of the Brazilian Government ( email )

Av. Presidente Antonio Carlos 51
17th. Centro
Rio de Janeiro RJ 20020-010, Rio de Janeiro 20020-010
Brazil
+55 21 35158658 (Phone)
+55 21 35158615 (Fax)

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