Oil Investments in the North Sea

The aim of this paper is to propose and estimate an econometric model for the exploration development and extraction of oil in the North Sea. The starting points of our analysis are the recent studies by Pesaran( 1990) and Favero(l991). Pesaran (1990) proposes and estimates an intertemporal model of the exploration and production policy of price-taking suppliers. The optimal decision rules for exploration and production are derived by solving a constrained stochastic intertemporal profit maximization problem. The model recognizes two types of costs: exploration expenditures and the costs of development and production which is assumed to be a convex function varying positively with the rate of extraction and negatively with the level of remaining proven reserves. This cost function is justified on the basis of the available engineering information concerning the determinants of the pressure dynamics of the petroleum reserves [Uhler( 1979)l: current extraction, by reducing the level of reserves and the reservoir’s pressure tends to increase extraction costs. By the same argument, any increase in reserves, reduces future extraction costs.

By: C. A Favero , M. Hashem Pesaran

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