| Summary: | Large demands for water by the mining industry are of increasing concern around the world and access to water is seen as a significant constraint on future mine development. Citizens, environmental groups and other non-governmental organizations have called for better regulation of water consumption by the mining industry in many regions across the globe. This thesis analyzes the efficiency of a specific command and control water management policy in the Lower Athabasca River Region in Alberta, Canada applied to oil sands mining operations. This policy imposes different restrictions on water withdrawals from the river according to the severity of threat to the aquatic ecosystem due to low water levels. In developing the policy, the Alberta government focused on the potential environmental impacts of projected water use by the oil sands industry. Economic cost was considered only in terms of the cost to the oil sands industry of constructing water storage facilities. This thesis undertakes a more robust examination of economic cost by developing a stochastic optimal control model for an oil sands firm choosing production and water use rates, as well as the optimal timing to build a water storage facility. A Hamilton Jacobi Bellman equation is specified which incorporates uncertain oil prices as well as uncertain water flow volumes in the Athabasca River and a numerical solution is implemented using a finite difference approach. The price of oil is modelled as a log-mean reverting stochastic process. Uncertainty in river flows is captured by modelling the restrictions on water withdrawals as a regime switching stochastic process. The thesis estimates the economic cost of the restrictions in terms of the difference in value of the oil-producing asset with and without water restrictions. In Chapter 2, the model is used to analyze the Phase 1 water regulations, which were first applied in 2007. The Phase 1 regulations classified river water flows into green, yellow, or red zones with green implying abundant water and ...
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