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Simple Analytics of Valuing Producing Petroleum Reserves

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  • Graham A. Davis
  • Robert D. Cairns

Abstract

We modify the approach to valuing mineral reserves that is current in economic literature by considering a net present-value rule under uncertainty. Direct application of Hotelling's rule is found to be inappropriate. The modification is such that the present value is approximately half that proposed by the Hotelling Valuation Principle.

Suggested Citation

  • Graham A. Davis & Robert D. Cairns, 1998. "Simple Analytics of Valuing Producing Petroleum Reserves," The Energy Journal, , vol. 19(4), pages 133-142, October.
    • Handle: RePEc:sae:enejou:v:19:y:1998:i:4:p:133-142
    DOI: 10.5547/ISSN0195-6574-EJ-Vol19-No4-6
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    References listed on IDEAS

    as
    1. Eric Pickles & James L. Smith, 1993. "Petroleum Property Valuation: A Binomial Lattice Implementation of Option Pricing Theory," The Energy Journal, , vol. 14(2), pages 1-26, April.
    2. James L. Paddock & Daniel R. Siegel & James L. Smith, 1988. "Option Valuation of Claims on Real Assets: The Case of Offshore Petroleum Leases," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 103(3), pages 479-508.
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    Cited by:

    1. Weston, J. Fred & Johnson, Brian A. & Siu, Juan A., 1999. "Mergers and restructuring in the world oil industry," Journal of Energy Finance & Development, Elsevier, vol. 4(2), pages 149-183.
    2. Soren T. Anderson & Ryan Kellogg & Stephen W. Salant, 2018. "Hotelling under Pressure," Journal of Political Economy, University of Chicago Press, vol. 126(3), pages 984-1026.
    3. James L. Smith, 2015. "Valuing Barrels of Oil Equivalent," The Energy Journal, International Association for Energy Economics, vol. 0(Adelman S).
    4. Davis, Graham A., 2001. "The Credibility of a Threat to Nationalize," Journal of Environmental Economics and Management, Elsevier, vol. 42(2), pages 119-139, September.
    5. Cairns, Robert D., 2014. "The green paradox of the economics of exhaustible resources," Energy Policy, Elsevier, vol. 65(C), pages 78-85.
    6. Johnson Kakeu, 2023. "Concerns for Long-Run Risks and Natural Resource Policy," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 84(4), pages 1051-1093, April.
    7. Richard G. Newell & Brian C. Prest & Ashley Vissing, 2016. "Trophy Hunting vs. Manufacturing Energy: The Price-Responsiveness of Shale Gas," NBER Working Papers 22532, National Bureau of Economic Research, Inc.
    8. Hansen, T.A., 2022. "Stranded assets and reduced profits: Analyzing the economic underpinnings of the fossil fuel industry's resistance to climate stabilization," Renewable and Sustainable Energy Reviews, Elsevier, vol. 158(C).

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    More about this item

    Keywords

    Oil prices; Hotelling model; oil reserve valuation; oil production;
    All these keywords.

    JEL classification:

    • F0 - International Economics - - General

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