Can combined investments reduce the impact of uncertainty? CO2 Enhanced Oil Recovery

Abstract

To reach the transition towards resource efficient, low carbon economies the involvement of all economic actors is required. Focus of this paper is on combined investment decisions that result in multiple uncertain revenue streams. The developed model is based on the theoretical framework provided by Adkins and Paxson (2011) and is applied for a case study on CO2 enhanced oil recovery. In contrast to standard real options theory, We show that when complementary activities that require separate investments can be fully integrated, the revenue streams resulting from the different underlying assets are mutually reinforcing. If the revenues from these investments are not highly correlated, and if the revenue stream of one underlying asset is relatively high, uncertainty in the revenue resulting from the other underlying asset stimulates total investment. This result suggests that the firm is not only protected from a downside risk by having the option to invest. Also the higher revenues of the other asset protect the firm from this risk, even though there is uncertainty in these revenues as well.