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The Impact of Stochastic Extraction Cost on the Value of an Exhaustible Resource: An Application to the Alberta Oil Sands

Abdullah Almansour and Margaret Insley

Year: 2016
Volume: Volume 37
Number: Number 2
DOI: 10.5547/01956574.37.2.aalm
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Abstract:
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.



A Compound Real Option Approach for Determining the Optimal Investment Path for RPV-Storage Systems

Benjamin Hassi, Tomas Reyes, and Enzo Sauma

Year: 2022
Volume: Volume 43
Number: Number 3
DOI: 10.5547/01956574.43.3.bhas
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Abstract:
The use of residential Photovoltaic-Storage systems may produce large benefits to owners and has expanded rapidly in recent years. Nonetheless, large uncertainties regarding the profitability of these systems make it necessary to incorporate flexibilities in their economic evaluations. This paper offers a new method to evaluate the compound flexibility of both the option of delaying investments and the option of further expanding the capacity of solar photovoltaic modules and batteries during the investment horizon. Flexibility is modeled as a compound real option, whose value is computed using a novel method that we call Compound Least Squares Monte Carlo (CLSM). The model is applied to the investment decisions associated to a residential Photovoltaic-Storage system. Results suggest that investors should use the proposed CLSM method in the economic valuation of multi-stage projects, since considering only a single flexibility could promote sub-optimal decisions. Moreover, in our case study, we show that it is optimal to break the investment down into two steps or more in 36% of future scenarios, on average.





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