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Extracting Common Oil: Cooperation or Competition?

Rognvaldur Hannesson

Year: 2000
Volume: Volume21
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol21-No2-5
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Abstract:
This paper considers how likely it is that a given number of agents who share a homogeneous oil reservoir will exploit the reservoir for their common benefit. A game-theoretical model is used, examining whether one agent would profit from deviating from the cooperative strategy, given that the remaining agents would follow a subgame-perfect retaliation strategy. The paper also, examines the sensitivity of the cooperative solution to the number of agents, the, time it takes to discover a deviation, the value of production relative to, investment, and the discount rate. It isf ound that the cooperative solution is very sensitive to the number of agents; with more than three agents the cooperative solution becomes very unlikely.



Petroleum Prospect Valuation: The Option to Drill Again

James L. Smith

Year: 2005
Volume: Volume 26
Number: Number 4
DOI: 10.5547/ISSN0195-6574-EJ-Vol26-No4-4
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Abstract:
We examine the value of an exploration prospect that is to be exploited via a series of possibly dependent trials. Failure on any particular trial is assumed to convey bad news, but also provides an option to try again. The pattern and strength of dependence among trials determines the value of this option, and therefore also influences the value of the underlying prospect. We describe the solution to this valuation problem, examine the behavior of the option premium, and characterize potential errors that are inherent in two ad hoc procedures that are often used to estimate prospect value. We demonstrate that the impact of dependence among trials is monotonic: each increase in the degree of dependence results in a further reduction in expected value of the prospect. We also characterize the particular pattern of dependence that is implied by a plausible model of exploratory risk.





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