Oil and Gas Production: An Empirical Investigation of the Common Pool

• Main Author: Balthrop, Andrew T
• Format: Others
• Published: Digital Archive @ GSU 2012
• Subjects: Oil; Natural Gas; Externality; Common Pool; Power Law; Spillover
• Online Access: http://digitalarchive.gsu.edu/econ_diss/80; http://digitalarchive.gsu.edu/cgi/viewcontent.cgi?article=1082&context=econ_diss

This dissertation focuses on the spatial aspects of oil and natural gas production to investigate the extent and effects of inefficient and unnecessary spatial competition. Because oil and natural gas are migratory, operators can cause hydrocarbon resources to flow from a neighboring property onto his or her own through rapid extraction. This problem is compounded when productive leases are comparatively small, as is the case in Texas. Following an introduction and literature review, the third chapter takes advantage of a natural experiment to demonstrate how spillovers in production limit total cumulative recovery, and how the assignment of secure property rights can enhance economic outcomes. The chapter examines production from wells in Oklahoma and Texas near the panhandle border. While wells on either side of this line have similar geologies and so should be similarly productive they are exposed to different treatments: Oklahoma has a much higher rate of unitization (a contractual scheme where competing owners hire a common operator and share profits), whereas the unitization rate in Texas is lower. Using regression discontinuity design, I find that Oklahoma wells are produced more slowly early on, and that this results in greater cumulative recovery over the course of a well’s life (150% more relative to Texas). These results are robust after controlling for reservoir specific effects, and across parametric, semi-parametric and nonparametric specifications. xiiThe fourth chapter quantifies the degree to which competing owners interfere with each other’s production through spatial spillovers. I use a spatial econometric model that controls for spatial autocorrelation and spatial dependence and can therefore identify the spillovers in production. Additionally, by comparing leases owned by competing producers to leases owned by a common producer, I show empirically how securing property rights through common ownership can alleviate the externality in production. A priori, one would expect that when a common producer owns adjacent leases, the producer has the incentive to fully account for how spillovers in production affect neighboring wells. Conversely, when adjacent landowners are in competition to extract the resource, they will not account for the damage rapid production causes at neighboring wells. After controlling for secondary injection I find that this is indeed the case for Slaughter field of West Texas. The fifth chapter investigates the statistical properties of oil and natural gas production. I find striking evidence that both oil and natural gas production are power-law distributed with the exponent approximately equal to one. This distribution might arise from disequilibrium in production and exploration. Highlighting this distribution is important because it has potential consequences for the political economy of regulation as well as for resource management. For example, because the most productive wells lie in the far-right tail of the distribution, regulation geared to prevent a Deepwater Horizon scale spill need fall on a vanishingly small percent of wells. The distribution also has consequences for management because a company profitability depends disproportionately on how it manages its most productive wells. The sixth chapter provides a short conclusion.