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Geology or Economics? Testing Models of Irreversible Investment Using North Sea Oil Data

A. S. Hurn and Robert E. Wright
The Economic Journal
Vol. 104, No. 423 (Mar., 1994), pp. 363-371
Published by: Wiley on behalf of the Royal Economic Society
DOI: 10.2307/2234756
Stable URL: http://www.jstor.org/stable/2234756
Page Count: 9
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Geology or Economics? Testing Models of Irreversible Investment Using North Sea Oil Data
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Abstract

This paper tests the main implications of models of irreversible investment using data from operations in the oil fields in the North Sea. Discrete-time hazard regression models are used to ascertain the influence of economic variables, the expected price of oil, the variance of the price of oil and the level of reserves, on the lag between the discovery of a field and the decision to develop the field. We are able to control for heterogeneity in the data by incorporating variables which account for both the geological features of each field and individual operator characteristics. The results indicate that the expected price of oil and the level of reserves are important in influencing the appraisal duration but that the variance of the oil price is not. Variables capturing the non-economic features of the individual fields are also found to be significant factors affecting the appraisal lag.

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