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The Multi-Stage Investment Timing Game in Offshore Petroleum Production: Preliminary results from an econometric model

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  • Lin, C.-Y. Cynthia

Abstract

This paper uses a structural econometric model to analyze the investment timing game in offshore petroleum production that ensues on wildcat tracts in U.S. federal lands off the Gulf of Mexico. When individual petroleum-producing firms make their exploration and development investment timing decisions, there are two types of externalities that they do not internalize: an information externality and an extraction externality. The model I develop enables me to estimate the structural parameters governing each firm’s investment timing decisions and therefore to assess the net effect of these externalities. According to my results, the extraction externality appears to dominate the information externality. Moreover, decreasing the lease term may increase ex ante tract value and hence government profits. The econometric methodology presented in this paper can be employed to analyze any problem of dynamic multi-stage strategic decision making in the presence of externalities.

Suggested Citation

  • Lin, C.-Y. Cynthia, 2007. "The Multi-Stage Investment Timing Game in Offshore Petroleum Production: Preliminary results from an econometric model," Institute of Transportation Studies, Working Paper Series qt70t9n2r3, Institute of Transportation Studies, UC Davis.
  • Handle: RePEc:cdl:itsdav:qt70t9n2r3
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    1. Ariel Pakes & Michael Ostrovsky & Steven Berry, 2007. "Simple estimators for the parameters of discrete dynamic games (with entry/exit examples)," RAND Journal of Economics, RAND Corporation, vol. 38(2), pages 373-399, June.
    2. Chamberlain, Gary, 1987. "Asymptotic efficiency in estimation with conditional moment restrictions," Journal of Econometrics, Elsevier, vol. 34(3), pages 305-334, March.
    3. 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.
    4. Gary D. Libecap & James L. Smith, 2001. "Regulatory Remedies to the Common Pool: The Limits to Oil Field Unitization," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 1-26.
    5. Kenneth Hendricks & Dan Kovenock, 1989. "Asymmetric Information, Information Externalities, and Efficiency: The Case of Oil Exploration," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 164-182, Summer.
    6. James L. Paddock & Daniel R. Siegel & James L. Smith, 1988. "Option Valuation of Claims on Real Assets: The Case of Offshore Petroleum Leases," The Quarterly Journal of Economics, Oxford University Press, vol. 103(3), pages 479-508.
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    Keywords

    UCD-ITS-RR-07-29; Engineering;

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