Rescaling-contraction with a lower cost technology when revenue declines

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Publication date
2019-09Keyword
OR in natural resourcesTechnology switching options
Rescaling-contraction
Investment under uncertainty
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© 2019 Published by Elsevier B.V. Reproduced in accordance with the publisher's self-archiving policy. This manuscript version is made available under the CC-BY-NC-ND 4.0 license.Peer-Reviewed
YesOpen Access status
openAccessAccepted for publication
18/02/2019
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Show full item recordAbstract
A mature oil field rescaled contraction describes a switch to a technological alternative more appropriate for the depleted state of an underlying resource. Off-shore oil rigs are an illustration, since the original technological scale designed for very large output flows becomes inappropriate as the operational efficiency declines later in life and facing a dwindling output flow, so a more appropriate extraction technology becomes economic. A real option representation is formulated on a stochastic oil price and deteriorating output volume. We consider investment/divestment decisions both separately, and jointly, which have different implications for government policies and also option values. The resulting model yields analytical (or semi-analytical) results indicating that immediate switching to the lower cost technology could sometimes be hastened as the price volatility increases, depending on the current revenue, if divestment and switching are considered jointly. However, greater volatility could also promote hysteresis.Version
Accepted manuscriptCitation
Adkins R and Paxson D (2019) Rescaling-contraction with a lower cost technology when revenue declines. European Journal of Operational Research. 277(2): 574-586.Link to Version of Record
https://doi.org/10.1016/j.ejor.2019.02.037Type
Articleae974a485f413a2113503eed53cd6c53
https://doi.org/10.1016/j.ejor.2019.02.037