The Value of Information: A Bayesian Real Option Approach

Abstract

Abstract In this paper we propose a general methodology that applies Bayesian updating and real option theory to a probabilistic reservoir model, in order to assess the economic value of new information. The method has been tested on a gas field. The reservoir model that served as starting point for this study is described in companion paper1 at this conference. We studied four production scenarios that varied according to the size of the reserves, the city to which the gas was to be pumped and the planned level of the production plateau. Initially two wells and some seismic information were available. We show how to value the information coming from two new wells, and present guidelines for choosing between different exploitation scenarios in terms of their inherent risk.