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Simple Analytics of Valuing Producing Petroleum Reserves

Graham A. Davis and Robert D. Cairns

Year: 1998
Volume: Volume19
Number: Number 4
DOI: 10.5547/ISSN0195-6574-EJ-Vol19-No4-6
View Abstract

We modify the approach to valuing mineral reserves that is current in economic literature by considering a net present-value rule under uncertainty. Direct application of Hotelling's rule is found to be inappropriate. The modification is such that the present value is approximately half that proposed by the Hotelling Valuation Principle.

Adelman's Rule and the Petroleum Firm

Robert D. Cairns and Graham A. Davis

Year: 2001
Volume: Volume22
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol22-No3-2
No Abstract

Mineral Depletion and the Rules of Resource Dynamics

Robert D. Cairns and Graham A. Davis

Year: 2015
Volume: Volume 36
Number: Adelman Special Issue
DOI: 10.5547/01956574.36.SI1.rcai
View Abstract

Conditions of exploitation of natural resources under certainty and uncertainty in some canonical natural resource problems are unified as r-percent rules by which the sum of all sources of gain from refraining from an irreversible action is compared to the interest rate. Action is initiated once the gain from action equals the gain from inaction. Morris Adelman's insights, succinctly presented his 1990 paper on mineral depletion, are highlighted as implicitly recognizing, and even being grounded by, these timing rules.

Taxation and Investment Decisions in Petroleum

Graham A. Davis and Diderik Lund

Year: 2018
Volume: Volume 39
Number: Number 6
DOI: 10.5547/01956574.39.6.gdav
View Abstract

When governments apply high tax rates targeted at natural resource rent, there must be generous deductions in order to avoid investment disincentives. How generous is disputed. Based on standard finance theory and recommendations from the OECD and the IMF, the value that firms attach to future deductions depends on the risks of these, and the companies' after-tax weighted-average cost of capital cannot be applied directly. As an example, a simple model quantifies the difference between pre-tax and post-tax systematic risk when tax deductions are less risky than pre-tax cash flows. Osmundsen et al. (2015) suggest that the difference must be ignored by oil companies, since they cannot find the separate market values of tax deductions. But companies operating in different jurisdictions cannot then appreciate differences in tax systems, not even approximately, which will lead to suboptimal decisions. Tax designers may instead assume that companies have gradually adopted more sophisticated methods of investment decision making.

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