The Option Value of Acquiring Information in an Oilfield Production Enhancement Project |
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| Authors: | Margaret Armstrong,William Bailey,Benoî t Couë t |
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| Affiliation: | Co-creator of the quantitative finance group at the École des Mines de Paris. The group focuses its research on real options and modeling commodities (especially electricity) prices and has extensive links with the international mineral and petroleum industries.; Senior scientist at Schlumberger-Doll Research in Ridgefield, Connecticut, with a focus on risk analysis and financial engineering.; Manager of the Uncertainty, Risk &Optimization program at Schlumberger-Doll Research in Ridgefield, Connecticut. |
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| Abstract: | In many industrial applications, the option to acquire information instead of simply waiting for conditions to improve can add considerable value to projects. As one example, most oil wells require periodic "workovers" to maintain production at satisfactory levels, and acquiring up-to-date information on the reservoir using a production logging tool (PLT) generally improves the efficiency of such workovers.
This article presents a case study of oil production enhancement in which Bayesian analysis is incorporated into a real options framework to determine whether the additional cost of acquiring information is justified. This case is different from most applications of real options in that there are two main sources of uncertainty: the oil price and the reservoir. Bayesian analysis was used to update the reservoir model, using the PLT data together with prior knowledge about the reservoir. The updated reservoir model was then incorporated into a real options valuation framework. |
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