A hybrid economic-engineering model for natural gas production

An optimal control model which generalizes the traditional economic theory of exhaustible resource production is developed and applied to natural gas wells. These generalizations, which are empirically relevant for the natura l gas resources we analyze, allow (1) decreasing marginal production costs, (2) physical bounds on periodic production and (3) interdependencies betwe en the stock of the resource, the periodic production bounds, and the chose n production path. Generalization (1) follows from our cost function which is econometrically estimated, using time-series and cross-sectional data fr om 29 natural gas wells. To numerically implement (2) and (3), as well as t o allow the economic evaluation of alternative engineering technologies, we incorporate reservoir engineering models into our economic production mode l. The empirical applications of the model presented here use data from a w ell in West Texas to illustrate, inter alia, the importance of hybrid model ing in deciding whether to produce a particular well and, if so, how to mos t efficiently proceed with completion and production. (C) 1999 Elsevier Sci ence B.V. Al rights reserved.