The Korean Economic Review
Real Options Analysis of Oil and Gas Resource Development for Independent E&P Firms in the North Ame
Eunchun Park (Oklahoma State University) and Hojeong Park(Korea University)Year 2014Vol. 30No. 2
Since the beginning of the global oil crisis in the mid-2000s, oil and gas prices have beenmore volatile than other commodity prices. Accordingly, it is increasingly important for theindependent E&P companies that are relatively vulnerable to market uncertainty to chooseappropriate additional reserves of oil and gas. This paper provides a real options frameworkfor analyzing the reserve replacement decisions of independent E&P companies, consideringuncertain revenues and irreversible costs. The model considers the extraction cost per unitwell associated with the remaining reserve level per well and instant production. Focusingon the North American E&P companies, threshold levels of oil and gas prices are identifiedfor economic feasibility, above which it is optimal to undertake investment for reserveadditions. The results indicate that the relative gains from gas E&P projects are steadilydecreasing, primarily because of lowered gas prices triggered by recent gas developmentbooms in the North America. The policy implications from this finding support a moreconservative strategy and increased attempts in the field of gas development projects.