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Asymmetric war of attrition among competitors in oil exploration

This article models asymmetry in the war of attrition in oil exploration under uncertainty. The optimum moment for the players to invest depends on price uncertainty, the length of the exploration concession contract, the geological assets parameters, and the other company's competitive action. Geometric Brownian Motion is the assumed long-term oil price model, and the two players (oil companies) War of Attrition is the game for the competitive conflict. This paper expands Dias and Teixeira (2009), adding a more realistic scenario with an asymmetric case.

The impact of strategic interactions is relevant, especially when the two firms have similar exploratory triggers. For the asymmetric games, the ratio between the exploratory and quit triggers defines the degeneration to drilling action of one of the operators. In order to perpetuate the conflict, the exploratory triggers need to be similar between the companies, even with different prospects and investment evaluations. This situation happens when the ratio between the premium and investment of the two companies' projects are similar. The upper price of the interval for perpetuating the conflict also needs to coincide in price, in effect a rare situation, since the quit trigger depends on the probability of finding hydrocarbons in the neighboring block.