The Option Value of Refracturing Oil Wells: Implementation in a Binomial Lattice
- Babak Jafarizadeh (Heriot-Watt University) | Reidar B. Bratvold (University of Stavanger)
- Document ID
- Society of Petroleum Engineers
- SPE Journal
- Publication Date
- August 2019
- Document Type
- Journal Paper
- 1,903 - 1,911
- 2019.Society of Petroleum Engineers
- Economic Analysis, Well Valuation, Real Options
- 22 in the last 30 days
- 97 since 2007
- Show more detail
- View rights & permissions
|SPE Member Price:||USD 12.00|
|SPE Non-Member Price:||USD 35.00|
The steep production decline of unconventional oil wells means that positive cash flows only last for a short while. The operator must then decide whether to continue, abandon, or hydraulically refracture the well. The decision of when to refracture the reservoir has an economic effect on the value of a well, especially with the uncertain oil prices of the future. In this paper, we develop a flexible Markov-decision process that assumes that the optimal refracture or abandonment time depends on the stochastic mean-reverting behavior of prices (described in a binomial lattice) and the then-current level of production. the Excel Visual Basic for Applications (VBA) implementation of the algorithm accompanies this paper.
|File Size||452 KB||Number of Pages||9|
Albright, S. C. 2015. VBA for Modelers: Developing Decision Support Systems With Microsoft Office Excel, fifth edition. Boston, Massachusetts: Cengage Learning.
Bessembinder, H., Coughenour, J. F., Seguin, P. J. et al. 1995. Mean Reversion in Equilibrium Asset Prices: Evidence From the Futures Term Structure. J Finance 50 (1): 361–375. https://doi.org/10.2307/2329250.
Brennan, M. J. 1991. The Price of Convenience and the Valuation of Commodity Claims. In Stochastic Models and Option Values: Applications to Resources, Environment and Investment Problems, ed. B. Øksendal and D. Lund, 33–72. Bingley, UK: Emerald Group Publishing.
Cafaro, D. C., Drouven, M. G., and Grossmann, I. E. 2016. Optimization Models for Planning Shale Gas Well Refracture Treatments. AIChE J. 62 (12): 4297–4307. https://doi.org/10.1002/aic.15330.
Copeland, T. E. and Antikarov, V. 2001. Real Options: A Practitioner’s Guide, first edition. New York City: Texere.
Drouven, M. G. and Grossmann, I. E. 2016. Multi-Period Planning, Design, and Strategic Models for Long-Term, Quality-Sensitive Shale Gas Development. AIChE J. 62 (7): 2296–2323. https://doi.org/10.1002/aic.15174.
Drouven, M. G., Grossmann, I. E., and Cafaro, D. C. 2017. Stochastic Programming Models for Optimal Shale Well Development and Refracturing Planning Under Uncertainty. AIChE J. 63 (11): 4799–4813. https://doi.org/10.1002/aic.15804.
Eshkalak, M. O., Aybar, U., and Sepehrnoori, K. 2014. An Economic Evaluation on the Re-Fracturing Treatment of the US Shale Gas Resources. Presented at the SPE Eastern Regional Meeting, Charleston, West Virginia, 21–23 October. SPE-171009-MS. https://doi.org/10.2118/171009-MS.
Hahn, W. J. and Dyer, J. S. 2008. Discrete Time Modeling of Mean-Reverting Stochastic Processes for Real Option Valuation. Eur J Oper Res 184 (2): 534–548. https://doi.org/10.1016/j.ejor.2006.11.015.
Jafarizadeh, B. 2018. Binomial Lattice for Oil Well Refracturing Option, Excel VBA Software, retrieved from https://www.dropbox.com/s/0wps00n0kpvw6u5/Refrac_Valuation.xlsm?dl=0.
Jafarizadeh, B. and Bratvold, R. 2012. Two-Factor Oil-Price Model and Real Option Valuation: An Example of Oilfield Abandonment. SPE Econ & Mgmt 4 (3): 158–170. SPE-162862-PA. https://doi.org/10.2118/162862-PA.
Jafarizadeh, B. and Bratvold, R. B. 2015. Oil and Gas Exploration Valuation and the Value of Waiting. Eng Econ 60 (4): 245–262. https://doi.org/10.1080/0013791X.2015.1045647.
Karan, D. and Stephen, H. 2017. Investigation Into the Economic Impact and Recovery Effect of Various Completion Timing Strategies in Unconventional Wells. Presented at the SPE Oil and Gas India Conference and Exhibition, Mumbai, 4–6 April. SPE-185366-MS. https://doi.org/10.2118/185366-MS.
Laughton, D. G. and Jacoby, H. D. 1993. Reversion, Timing Options, and Long-Term Decision-Making. Financ Manage 22 (3): 225–240. https://doi.org/10.2307/3665940.
Pankaj, P., Gakhar, K., and Lindsay, G. 2016. When to Refrac? Combination of Reservoir Geomechanics With Fracture Modeling and Reservoir Simulation Holds the Answer. Presented at the SPE Asia Pacific Oil & Gas Conference and Exhibition, Perth, Australia, 25–27 October. SPE-182161-MS. https://doi.org/10.2118/182161-MS.
Pindyck, R. S. 1999. The Long-Run Evolution of Energy Prices. Energy J. 20 (2): 1–27. https://doi.org/10.5547/ISSN0195-6574-EJ-Vol20-No2-1.
Puterman, M. L. 2005. Markov Decision Processes: Discrete Stochastic Dynamic Programming, first edition. Hoboken, New Jersey: John Wiley & Sons.
Reeves, S. R., Hill, D. G., Hopkins, C. W. et al. 1999. Restimulation Technology for Tight Gas Sand Wells. Presented at the SPE Annual Technical Conference and Exhibition, Houston, 3–6 October. SPE-56482-MS. https://doi.org/10.2118/56482-MS.
Shreve, S. 2004. Stochastic Calculus for Finance I: The Binomial Asset Pricing Model, first edition. New York City: Springer Science+Business Media.
Smith, J. E. and McCardle, K. F. 1999. Options in the Real World: Lessons Learned in Evaluating Oil and Gas Investments. Oper Res 47 (1): 1–15. https://doi.org/10.1287/opre.47.1.1.
Smith, J. E. and Nau, R. F. 1995. Valuing Risky Projects: Option Pricing Theory and Decision Analysis. Manage Sci 41 (5): 795–816. https://doi.org/10.1287/mnsc.41.5.795.
Tavassoli, S., Yu, W., Javadpour, F. et al. 2013. Well Screen and Optimal Time of Refracturing: A Barnett Shale Well. J Pet Sci Eng 2013: 817293. https://doi.org/10.1155/2013/817293.
Warpinski, N. R., Mayerhofer, M. J., Vincent, M. C. et al. 2009. Stimulating Unconventional Reservoirs: Maximizing Network Growth While Optimizing Fracture Conductivity. J Can Pet Technol 48 (10): 39–51. SPE-114173-PA. https://doi.org/10.2118/114173-PA.
Wilkinson, D., Bailey, W. J., and Couët, B. 2012. Method for Consistent Valuation of Assets With Multiple Sources of Uncertainty. SPE Econ & Mgmt 4 (4): 204–214. SPE-163080-PA. https://doi.org/10.2118/163080-PA.