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Estimating strategic interactions in petroleum exploration

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Author Info

  • Lin, C.-Y. Cynthia

Abstract

When individual petroleum-producing firms make their exploration decisions, information externalities and extraction externalities may lead them to interact strategically with their neighbors. If they do occur, strategic interactions in exploration would lead to a loss in both firm profit and government royalty revenue. Since these strategic interactions would be inefficient, changes in the government offshore leasing policy would need to be considered. The possibility of strategic interactions thus poses a concern to policy-makers and affects the optimal government policy. This paper examines whether these inefficient strategic interactions take place in U.S. federal lands in the Gulf of Mexico. In particular, it analyzes whether a firm's exploration decisions depend on the decisions of firms owning neighboring tracts of land. A discrete response model of a firm's exploration timing decision that uses variables based on the timing of a neighbor's lease term as instruments for the neighbor's decision is employed. The results suggest that strategic interactions do not actually take place, at least not in exploration, and therefore that the current parameters of the government offshore leasing policy do not lead to inefficient petroleum exploration.

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Bibliographic Info

Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 31 (2009)
Issue (Month): 4 (July)
Pages: 586-594

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Handle: RePEc:eee:eneeco:v:31:y:2009:i:4:p:586-594

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Web page: http://www.elsevier.com/locate/eneco

Related research

Keywords: Petroleum exploration Strategic interactions Spatial interactions;

References

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  1. Libecap, Gary D & Wiggins, Steven N, 1985. "The Influence of Private Contractual Failure on Regulation: The Case of Oil Field Unitization," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 690-714, August.
  2. Newey, Whitney K., 1987. "Efficient estimation of limited dependent variable models with endogenous explanatory variables," Journal of Econometrics, Elsevier, vol. 36(3), pages 231-250, November.
  3. Robert H. Porter, 1992. "The Role of Information in U.S. Offshore Oil and Gas Lease Auctions," NBER Working Papers 4185, National Bureau of Economic Research, Inc.
  4. repec:att:wimass:9127 is not listed on IDEAS
  5. Libecap, Gary D & Wiggins, Steven N, 1984. "Contractual Responses to the Common Pool: Prorationing of Crude Oil Production," American Economic Review, American Economic Association, vol. 74(1), pages 87-98, March.
  6. Manski, Charles F, 1993. "Identification of Endogenous Social Effects: The Reflection Problem," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 531-42, July.
  7. Gary D. Libecap & James L. Smith, 1999. "The Self-Enforcing Provisions of Oil and Gas Unit Operating Agreements: Theory and Evidence," NBER Working Papers 7142, National Bureau of Economic Research, Inc.
  8. Hendricks, Kenneth & Porter, Robert H, 1992. "Joint Bidding in Federal OCS Auctions," American Economic Review, American Economic Association, vol. 82(2), pages 506-11, May.
  9. Hendricks, Kenneth & Porter, Robert H, 1996. "The Timing and Incidence of Exploratory Drilling on Offshore Wildcat Tracts," American Economic Review, American Economic Association, vol. 86(3), pages 388-407, June.
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Cited by:
  1. Pfeiffer, Lisa & Lin, C.-Y. Cynthia, 2012. "Groundwater pumping and spatial externalities in agriculture," Journal of Environmental Economics and Management, Elsevier, vol. 64(1), pages 16-30.

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