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 natural gas resources we analyze, allow (1) decreasing marginal production costs, (2) physical bounds on periodic production and (3) interdependencies between the stock of the resource, the periodic production bounds, and the chosen production path. Generalization (1) follows from our cost function which is econometrically estimated, using time-series and cross-sectional data from 29 natural gas wells. To numerically implement (2) and (3), as well as to allow the economic evaluation of alternative engineering technologies, we incorporate reservoir engineering models into our economic production model. The empirical applications of the model presented here use data from a well in West Texas to illustrate, inter alia, the importance of hybrid modeling in deciding whether to produce a particular well and, if so, how to most efficiently proceed with completion and production. (C) 1999 Elsevier Science B.V. Al rights reserved.