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Drilling Deadlines and Oil and Gas Development

Author

Listed:
  • Evan Herrnstadt
  • Ryan Kellogg
  • Eric Lewis

Abstract

Oil and gas leases between mineral owners and extraction firms typically specify a date by which the firm must either drill a well or lose the lease. These deadlines are known as primary terms. Using data from the Louisiana shale boom, we first show that well drilling is substantially bunched just before the primary term deadline. This bunching is not necessarily surplus‐reducing: using an estimated model of firms' drilling and input choices, we show that primary terms can increase total surplus by countering the effects of leases' royalties, as royalties are a tax on revenue and delay drilling. These benefits are reduced, however, when production outcomes are sensitive to drilling inputs and when drilling one well indefinitely extends the period of time during which additional wells may be drilled. We enrich the model to consider mineral owners' lease offers and find small effects of primary terms on owners' revenue.

Suggested Citation

  • Evan Herrnstadt & Ryan Kellogg & Eric Lewis, 2024. "Drilling Deadlines and Oil and Gas Development," Econometrica, Econometric Society, vol. 92(1), pages 29-60, January.
    • Handle: RePEc:wly:emetrp:v:92:y:2024:i:1:p:29-60
    DOI: 10.3982/ECTA18436
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    References listed on IDEAS

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    Cited by:

    1. Martin, Julien & Pesendorfer, Martin & Shannon, Jack, 2025. "Underbidding for oil and gas tracts," LSE Research Online Documents on Economics 128285, London School of Economics and Political Science, LSE Library.
    2. Levan Elbakidze & Douglas Mugabe & Gulnara R. Zaynutdinova, 2025. "Real options investments: Lessons from the US shale gas industry," The Financial Review, Eastern Finance Association, vol. 60(3), pages 701-728, August.
    3. Harleman, Max & Manohar, Pramod & Hill, Elaine L., 2025. "Negotiations of oil and gas auxiliary lease clauses: Evidence from Pennsylvania’s Marcellus Shale," Resource and Energy Economics, Elsevier, vol. 83(C).

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