REES Department Seminar – Dr. Douglas Mugabe – Friday, November 18, 2022

Date(s) - 18/11/2022
3:30 pm - 5:00 pm
550 General Services Building, 550 General Services Building University of Alberta , Edmonton Alberta

Title: Real option investments and exercise timing: Lessons from the US shale gas industry
Speaker: Dr. Douglas Mugabe, University of Alberta, Department of Resource Economics & Environmental Sociology
Date: Friday, November 18, 2022
Location: 550 General Services Building
Time: 3:30 pm-5:00 pm

Using detailed project-level investment data from the natural gas industry in the United States, we examine the effect of unexercised real options on new real options investments and exercise timing. In the upstream unconventional gas industry, drilling a new well is a real options investment. Unconventional wells start producing gas and generating revenue only after the firms exercise the options by fracturing and completing the drilled wells at an opportune time. Our results show that real options investments respond negatively while exercise decisions respond positively to the increase in the number of unexercised options. We find a significant difference in how publicly traded and privately held firms’ real option investment decisions respond to the increase in the number of unexercised real options.  We also show that the national (regional) number of unexercised real options increases (decreases) the probability of exercising the real options.

Keywords: Real Options, Investments, Real Option Exercise, Drilled but
Uncompleted Wells, Unconventional Gas Production.

JEL CLASSIFICATION: G4, L71, Q30, Q41, D22, G30, G31, G32

1 Department of Resource Economics and Environmental Sociology, University of Alberta. 9007-116 th St NW,
Edmonton, AB T6G 2H1, Canada. Email:
2 Division of Resource Economics and Management; Center for Innovation in Gas Research and Utilization, West
Virginia University, Unites States
3 Department of Finance, John Chambers College of Business and Economics, West Virginia University, United States

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