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Some Economic Issues in the Exploration for Oil and Gas

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New Frontiers in Oil and Gas Exploration

Abstract

In this chapter I present a simple economic model of exploration, and then discuss some predictions stemming from the model. I also describe some empirical phenomena relevant to exploration: trends in the probability of dry holes, the relation between oil prices and exploratory drilling, and developments in the deep water Gulf of Mexico.

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Notes

  1. 1.

    Gold [6] and Zuckerman [22] provide engaging and accessible accounts of the development of fracking in the USA since the turn of the century.

  2. 2.

    That the value of the deposit is proportional to the amount of oil found is sometimes called the “Hotelling valuation principle,” after Hotelling [7].

  3. 3.

    While it is conceivable that the efforts literally unearth zero oil, a more likely outcome is that the finds are relatively small. For example, Shell’s recent failure in the Chukchi sea did not come up completely empty; rather, the find was much smaller than hoped—to the point it did not merit paying the large development costs that would be required to extract and deliver that oil to market.

  4. 4.

    If one also takes uncertainty about prices into account, then this cutoff must also include an “option value,” which can be interpreted as the potential increase in profit associated with waiting a small period of time in the hope that price will rise [5, 12].

  5. 5.

    The EIA stopped updating this information after 2011. The available data report the combined number of dry holes associated with exploration for oil dry holes associated with exploration for natural gas.

  6. 6.

    As I noted in footnote 5, the EIA stopped reporting these data after 2011.

  7. 7.

    Data on the WTI spot price are available at U.S. Energy Information Administration [17].

  8. 8.

    These data are available from RigLogix (http://www.riglogix.com/). That information shows the starting and ending dates for each contract, the depth at which the rig operates, and the day rate (price per day), for 2547 drilling contracts under which drilling was undertaken between March 2002 and December 2014.

  9. 9.

    Focusing on these three rig types limits observation to operations in waters exceeding 500 m of depth. This cohort lies comfortably within the range the Bureau of Ocean Management interprets as deep water (drilling depths in excess of 1000 ft).

  10. 10.

    Moreover, during the period I analyze, 2010 to mid-2014, there was a glut of oil in storage near Cushing, OK—the location of the WTI trading hub—which depressed the WTI spot price [1]. This unusual effect did not manifest at the LLS trading hub.

  11. 11.

    That such predictions turned out to be wrong does not undercut their potential impact on drilling decisions made in the context of those predictions.

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Authors and Affiliations

  1. H.A. True Chair in Petroleum and Natural Gas Economics, Department of Economics & Finance, University of Wyoming, 1000 E. University Ave., Laramie, WY, 82071, USA

    Charles F. Mason

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  1. Charles F. Mason
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Correspondence to Charles F. Mason .

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Editors and Affiliations

  1. Department of Mechanical Engineering, State University of New York at Binghamton Department of Mechanical Engineering, Binghamton, New York, USA

    Congrui Jin

  2. Department of Civil and Environmental Engineering, Northwestern University, Evanston, Illinois, USA

    Gianluca Cusatis

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Mason, C.F. (2016). Some Economic Issues in the Exploration for Oil and Gas. In: Jin, C., Cusatis, G. (eds) New Frontiers in Oil and Gas Exploration. Springer, Cham. https://doi.org/10.1007/978-3-319-40124-9_16

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  • DOI: https://doi.org/10.1007/978-3-319-40124-9_16

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