Year: 2005
Type: article
Abstract: We examine the value of a petroleum exploration prospect that is to be exploited via a series of possibly dependent trials. The pattern and strength of dependence among trials is linked to a real option that affects the expected economic value of the prospect. We develop an exact, yet intuitive, expression for the expected value of such a prospect. We also show that two intuitive approaches to valuation provide strict upper and lower bounds for the actual value. Finally, the impact of dependence is shown to be monotonic: each increase in the degree of dependence among trials results in a further reduction in expected value of the prospect.
Source: The Energy Journal
Author: James L. Smith
Institution: Southern Methodist University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W2124274802