Modeling Exploration Dynamics and Uncertainty of Natural Gas Discoveries

Reserves estimations in natural gas markets are fundamental for decision making of private and public agents. When markets are mature, market signals such as demand growth, costs, and price expectations activate exploration and new reserves are continually added to the proven reserves base. We can describe the process of discovering new reserves in a market with a simple dynamic hypothesis in which investment in exploration eventually leads to increase proven reserves while probable reserves decrease. The simple dynamic hypothesis, however, does not seem able to explain the large reserves additions occurring in immature markets. In immature markets it is frequent to discover large natural gas reservoirs independently of the degree of exploration activity. Instead of rejecting our simple dynamic hypothesis, we broaden it by including discoveries as a stochastic component, aiming to capture some of the major uncertainties observed in immature natural gas markets.