Seminar: Clinton Levitt, Department of Economics, University of Iowa.
Titel: Learning through Oil and Gas Exploration.
Abstract:
In this paper, I investigate the importance of learning in oil and gas exploration. I construct a dynamic structural model of oil and gas exploration in which firms gradually learn about the productive qualities of different regions through exploratory drilling. Exploratory drilling is modeled as an information-gathering process in which each new exploratory well provides information concerning the probability of discovering additional pools as well as the expected volume of oil and gas contained in undiscovered pools. The model is geographically based and accounts for the heterogeneity in the characteristics of oil and gas deposits that can exist across large regions. The benefits of specifying a dynamic structural model over a reduced-form static one, which prevail in this literature, are that the effects of learning through discoveries and of changes in tax policy can be assessed quantitatively. The model is estimated using proprietary data acquired from a number of different sources which I organized in a geographic information system. The geographic information system contains records for over 400,000 wells drilled in the province of Alberta, Canada between 1930 and 2006. For the purpose of this study, I used data on exploratory wells drilled between 1930 and 1968. My estimates support the notion that spatial heterogeneity is important. I find considerable variation in the cost and revenue characteristics across different regions in Alberta. I estimate a second structural model, one with no learning, and show that the model with learning does a much better job at generating the observed geography of exploratory drilling. The broader implications of my model indicate that learning has important effects on drilling behaviour, and that these effects vary, depending on the specific characteristics of the regions being explored. In addition, my results show that oil and gas exploration is insensitive to changes in tax or royalty rates. Again, the degree of sensitivity depends on the characteristics of the region being explored.