“petroleum Concessions with Extendible Options Using Mean Reversion with Jumps to Model Oil Prices”

The holder of a petroleum exploration concession has an investment option until the expiration date fixed by the governmental agency, in some countries these rights can be extended by additional cost. The value of these rights and the optimal investment timing are calculated by solving a stochastic optimal control problem of an American call option with extendible maturities. The uncertainty of the oil prices is modeled as a mix jump-diffusion process. Normal information generates continuous meanreverting process for oil prices, whereas random abnormal information generates discrete jumps of random size. Comparisons are performed with the popular geometric Brownian process and also the quantification and analysis of alternative timing policies for the petroleum sector. Suggested JEL Classification: G31, G12 and Q39 1 Petrobras, Petróleo Brasileiro S.A. Address: Petrobras/E&P/Gerer/Corfex Av. Chile 65, sala 1701-C. Centro. Rio de Janeiro, RJ. Brasil. Zip code: 20035-900 Phone: (021)5342164 ; Fax: (021)5341579 Email: [email protected] ; Website: http://www.puc-rio.br/marco.ind/main.html 2 Instituto de Pesquisa Econômica Aplicada (IPEA) Address : IPEA/DIPES Av. Presidente Antônio Carlos n 51, 15 andar, sala:1514. Centro, Rio de Janeiro. RJ. Brasil.. Zip code:20020-010 Phone: (021)2121158 Email : [email protected] 3 The current paper version was approved to be presented to the 3 International Conference on Real Options, Wassenaar/Leiden, The Netherlands, June 6-8, 1999. The same version was submitted to the Lenos Trigeorgis, Eds., forthcoming book on real options by the Oxford University Press.