An oil company that wants to increase its reserves has a first decision to make: the way to do it. Is it better to invest in exploration than to acquire reserves that have been already proved by rival companies? The market has been inclined to both options alternatively.
The 80's found the companies with a high cash flow as a consequence of the oil shocks that characterized the previous years. That circumstance as much as the expectations of a lower increase in prices in the medium range, favoured the purchases of reserves. Now, the situation seems to be reverted. This paper tries to find out what are the determinants that make an enterprise decide whether purchasing or exploring is better.
A good oportunity to analize these variables is given by the facts in which Argentina was involved between 1989–1990.
After several years of nonexistent growth in the oil industry, in 1985 Argentine administration announced a large exploration program for private companies. Most exploration agreements were signed in 1989.
On the other hand, YPF, the state petroleum company, auctioned to international buyers 38 oil fields. The purchase ended in July 1990. In view of this, some companies chose exploration while others decided in favour of investment in YPF fields.
After theoretical treatment of the elements that are the basis on which exploration and purchase is evaluated, this was confronted with the variables that the managers of those companies projected in order to prove its use in reality.