Value Change in Oil and Gas Production: IV Unresolved Options with New Information Acquisition

Abstract

This paper considers the situation after one has committed to acquiring new information but when the information acquired does not resolve completely an ambiguity in potential new reserves for a producing field. As a consequence, management must decide whether further studies are warranted at some cost and with only a finite probability such studies would lead to a successful venture, or whether it is more appropriate to abandon the investment. Because there are a large number of ways such an investigation can be handled, and because a large number of possible parameter values can influence the decision, in this paper we restrict the analysis to just two variables: either a fixed probability of success after further studies but with a variable cost for the studies, or where there is a fixed cost allowed for the studies but the success probability after the studies is variable. Other situations involving more complex but more realistic, groupings of variable and often unknown parameters will be considered in later papers in this series. The simple examples given here are provided to illustrate as sharply as possible extreme end-member situations when resolution is not achieved with acquisition of information alone.