RT Journal Article SR Electronic T1 How and Why Petroleum Leases Are Held by Production: Analysis of a Compound Option JF Land Economics JO Land Econ FD University of Wisconsin Press SP 52 OP 72 DO 10.3368/le.94.1.52 VO 94 IS 1 A1 James L. Smith YR 2018 UL http://le.uwpress.org/content/94/1/52.abstract AB Most oil and gas leases allow the operator to extend possession by establishing production in paying quantities. We show how this option to “hold by production” (HBP) stimulates the drilling of many uneconomic wells but also creates incentives to delay other economic wells. We provide a simple method to value the HBP provision as a compound option and estimate that it has increased the value of typical shale gas leases in the major U.S. basins by 25% to 250% in recent years. We also identify subbasins where drilling appears likely to have been suppressed rather than stimulated. (JEL D81, Q33)