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The Option To (re)develop Or Abandon A Mature Depreciating Oil Field

Towards the end of the life of mature fields, the decline in production leads to diminishing cash flows. At this stage, the operator faces the crucial decision of either continuing, abandoning, or reaching for remaining, but harder-to-access reserves. The timing of this decision has economic consequences, particularly with uncertain prices and technical challenges. The optimal decision of redevelopment or abandonment depends on the level of prices and the chance of success in accessing added reserves. We use an integrated real options framework through an illustrative example to discuss solutions and sensitivities to this multi-dimensional problem.