The Self-Enforcing Provisions of Oil and Gas Unit Operating Agreements: Theory and Evidence
AbstractThis paper extends the existing theory and empirical investigation of unitization contracts. It highlights the importance of incentive-compatibility and self-enforcement and the bargaining problems faced in achieving viable, long-term contracts. We argue that only if the parties to a unitization contract have unit production shares that are the same as their cost shares will the contract be incentive compatible. Using a data base of sixty unit operating agreements, we measure the industry's actual behavior against the principles of production from a common pool. Our survey of units that have only one production phase and that are relatively homogeneous reveals that such equal sharing rules are always found and they appear to encourage the parties to behave optimally. In more complex units with multiple production phases and/or separate concentrations of oil and gas (gas caps) we find deviations from the theoretical ideal. In the case of multi-phase units, we find equal cost and production shares within phases, but not across phases. A pre-set trigger for shifting from one production phase to the next helps to maintain optimal behavior. For gas cap units, however, we generally do not find the equal sharing rule. Conflicts and rent dissipation follow as illustrated by the case of the Prudhoe Bay Unit. The paper describes the desirable contract rules for avoiding moral hazard. It also shows how the effects of those rules can be replicated in difficult situations.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7142.
Date of creation: May 1999
Date of revision:
Publication status: published as Journal of Law, Economics and Organization, Vol. 12, no. 2 (1999): 526-548.
Note: IO EEE
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Other versions of this item:
- Libecap, Gary D & Smith, James L, 1999. "The Self-Enforcing Provisions of Oil and Gas Unit Operating Agreements: Theory and Evidence," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(2), pages 526-48, July.
- K00 - Law and Economics - - General - - - General (including Data Sources and Description)
- L00 - Industrial Organization - - General - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-1999-06-08 (All new papers)
- NEP-ENE-1999-06-08 (Energy Economics)
- NEP-ENV-1999-06-08 (Environmental Economics)
- NEP-IND-1999-06-08 (Industrial Organization)
- NEP-LAW-1999-06-08 (Law & Economics)
- NEP-MIC-1999-06-08 (Microeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Smith, James L, 1987. "The Common Pool, Bargaining, and the Rule of Capture," Economic Inquiry, Western Economic Association International, vol. 25(4), pages 631-44, October.
- Klein, Benjamin, 1996. "Why Hold-Ups Occur: The Self-Enforcing Range of Contractual Relationships," Economic Inquiry, Western Economic Association International, vol. 34(3), pages 444-63, July.
- 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.
- Douglas W. Allen & Dean Lueck, 1993. "Transaction Costs and the Design of Cropshare Contracts," RAND Journal of Economics, The RAND Corporation, vol. 24(1), pages 78-100, Spring.
- Wiggins, Steven N & Libecap, Gary D, 1985. "Oil Field Unitization: Contractual Failure in the Presence of Imperfect Information," American Economic Review, American Economic Association, vol. 75(3), pages 368-85, June.
- Gary D. Libecap, 2010. "Institutional Path Dependence in Climate Adaptation: Coman's “Some Unsettled Problems of Irrigation”," NBER Working Papers 16324, National Bureau of Economic Research, Inc.
- Jongwook Kim & Joseph T. Mahoney, 2002. "Resource-based and property rights perspectives on value creation: the case of oil field unitization," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 23(4-5), pages 225-245.
- Gary D. Libecap, 2011. "Institutional Path Dependence in Climate Adaptation: Coman's "Some Unsettled Problems of Irrigation"," American Economic Review, American Economic Association, vol. 101(1), pages 64-80, February.
- Maze, Armelle, 2006. "Multilateral reputation mechanisms and contract law in agriculture : complement or substitutes," 2006 Annual meeting, July 23-26, Long Beach, CA 21285, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
- Lin, C.-Y. Cynthia, 2009. "Estimating strategic interactions in petroleum exploration," Energy Economics, Elsevier, vol. 31(4), pages 586-594, July.
- Gary D. Libecap, 2010. "Institutional Path Dependence in Climate Adaptation: Coman’s “Some Unsettled Problems of Irrigation”," ICER Working Papers 33-2010, ICER - International Centre for Economic Research.
- Boyce, John R. & Nøstbakken, Linda, 2011. "Exploration and development of U.S. oil and gas fields, 1955-2002," Journal of Economic Dynamics and Control, Elsevier, vol. 35(6), pages 891-908, June.
- Gary Libecap, 2007. "Regulation and Deregulation: Property Rights Allocation Issues in De Regulation of Common Pool Resources," ICER Working Papers 28-2007, ICER - International Centre for Economic Research.
- Gary D. Libecap, 2013. "Addressing Global Environmental Externalities: Transaction Costs Considerations," NBER Working Papers 19501, National Bureau of Economic Research, Inc.
- Lin, C.-Y. Cynthia & Leighty, Wayne, 2007.
"Government Leasing Policy and the Multi-Stage Investment Timing Game in Offshore Petroleum Production,"
Institute of Transportation Studies, Working Paper Series
qt1rj6v4df, Institute of Transportation Studies, UC Davis.
- Lin, C.-Y. Cynthia & Leighty, Wayne, 2007. "Government Leasing Policy and the Multi-Stage Investment Timing Game in Offshore Petroleum Production," Institute of Transportation Studies, Working Paper Series qt0x81x3jp, Institute of Transportation Studies, UC Davis.
- Zeynep K. Hansen & Gary D. Libecap, 2003.
"Small Farms, Externalities, and the Dust Bowl of the 1930's,"
NBER Working Papers
10055, National Bureau of Economic Research, Inc.
- Zeynep K. Hansen & Gary D. Libecap, 2004. "Small Farms, Externalities, and the Dust Bowl of the 1930s," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 665-694, June.
- Jongwook Kim & Joseph T. Mahoney, 2005. "Property rights theory, transaction costs theory, and agency theory: an organizational economics approach to strategic management," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 223-242.
- Altman, Ira J. & Johnson, Thomas G., 2004. "A Transaction Cost Econoimcs View Of Agriculture Exchanges For Biopower: Theoretical And Methodological Concerns," 2004 Annual Meeting, February 14-18, 2004, Tulsa, Oklahoma 34686, Southern Agricultural Economics Association.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.