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On the Economics of Improved Oil Recovery: The Optimal Recovery Factor from Oil and Gas Reservoirs

Abstract:
This paper investigates an oil company's optimal depletion of oil and gas reservoirs, taking into account that the depletion policy itself influences the recoverable reserves, i.e. determines the recovery factor. The emphasis is on the role of up-front capital costs. The depletion policy is derived from the amount of investment in production and associated injection projects, represented in a stylized fashion. I make a comparative static study of how various economic factors influence the company's choice of an optimal depletion policy and, thus, implicitly of an optimal recovery factor.

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Energy Specializations: Petroleum – Exploration and Production

JEL Codes:
D24 - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

Keywords: Oil, natural gas, Reservior, Improved recovery, Optimal depletion, Hotelling

DOI: 10.5547/ISSN0195-6574-EJ-Vol9-No4-4


Published in Volume 9, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.