Efforts and Efficiency in Oil Exploration: A Vector Error-Correction Approach

Abstract

High oil prices and gradual resource depletion have raised global concerns for security of energy supply. Successful exploration activity is a critical factor for future oil production. Based on standard neoclassical producer behavior and modern time series econometrics, this study reveals new insights into the process of oil and gas exploration. I find that reserve additions are enhanced by an increase in the oil price, due to responses both in effort and efficiency of exploration. Moreover, oil companies accept higher exploration risk in response to an oil price increase, implying lower success rates and higher expected discovery size.

Understanding rig rate formation in the Gulf of Mexico

“…While these three studies focus on oil, Iledare (1995) estimates the effects of wellhead gas prices on natural gas drilling effort in West Virginia over the period 1977-1987. There exists a number of other related empirical studies of oil and gas exploration and development, see e.g. Lin (2009) for the GoM area, Kemp and Kasim (2003) for the UK Continental Shelf, and Mohn (2008) and Mohn and Osmundsen (2008) for the Norwegian Continental Shelf. For studies of incentive design in drilling contracts, see Moomjian (1992) and Osmundsen et al (2010c).…”

Pro-cyclical petroleum investments and cost overruns in Norway

“…Previous empirical research on investment patterns in the Norwegian petroleum sector is related to exploration, see Mohn andOsmundsen (2008, 2011). We look at the major component of petroleum investment -development projects.…”

“…The success rate in the petroleum industry is only 25% and Merrow (2012) Mohn and Osmundsen, 2008;2011 andMohn 2008).…”

The Effect of Oil Prices on Offshore Production: Evidence from the Norwegian Continental Shelf

“…Mohn [2008a] suggests and finds evidence for the idea that in periods of high oil prices o↵-shore producers will invest more in risky wild-cat drilling in search of new fields, but concentrate investments in lower-risk ventures, like expanding production in existing fields, when prices are low. If this e↵ect were to dominate, then it may even be plausible that production in existing fields reacts negatively to increases in price.…”

“…Mohn and Osmundsen [2008] finds that long-term changes in the oil-price has a strong e↵ect on exploratory drilling though little e↵ect is measured from short-term changes in the oil price. Osmundsen et al [2010] analyses drilling productivity over time on the Norwegian Continental Shelf while Mohn [2008a] finds that higher oil prices leads to higher reserves and as well as that oil prices a↵ect producer risk-preferences -with higher prices leading to lower success rates but larger discovery size.…”