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Estimating strategic interactions in petroleum exploration

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  • 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.

Suggested Citation

  • Lin, C.-Y. Cynthia, 2009. "Estimating strategic interactions in petroleum exploration," Energy Economics, Elsevier, vol. 31(4), pages 586-594, July.
  • Handle: RePEc:eee:eneeco:v:31:y:2009:i:4:p:586-594
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    References listed on IDEAS

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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.
    2. Bell, Peter N, 2015. "Mineral exploration as a game of chance," MPRA Paper 62159, University Library of Munich, Germany.
    3. Osmundsen, Petter & Rosendahl, Knut Einar & Skjerpen, Terje, 2015. "Understanding rig rate formation in the Gulf of Mexico," Energy Economics, Elsevier, vol. 49(C), pages 430-439.
    4. Bosede Comfort OLOPADE & David OLOPADE, "undated". "The Impact of Government Expenditure on Economic Growth and Development in Developing Countries: Nigeria as a Case Study," EcoMod2010 259600123, EcoMod.

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