Three Essays in the Public Economics of Offshore Hydrocarbon Investment and Production.

Abstract

Offshore sources, in both shallow and deep waters, are increasingly important contributors to global oil and natural gas production. As both resource owner and taxing authority, national governments play an important role in the production of these offshore hydrocarbons. How the policy choices of these governments affect firm behavior, however, is not necessarily well understood. This dissertation contributes to our knowledge of how public policy influences offshore hydrocarbon investment and production.

In the first essay, I estimate the investment responses of hydrocarbon producers to the suspension of the royalty, a type of production tax levied on production from federal lands. I find that the potential for a royalty payments waiver: (1) increases the probability that an individual tract is acquired by an average of 193% (a mean increase of 5.6 percentage points); (2) decreases the probability that a lease is ever drilled during its observed lease term by an average of 14.5% (a mean decrease of 1.3 percentage points); and (3) increases the expected number of explored leases by 150%. The introduction of DWRRA also increases the average winning bid per lease by 60%.

In the second essay, I quantify the implied value of information spillovers in oil and natural gas exploration using an event study design. I find that 25 trading days after a discovery, firms that own leases adjacent to the discovery lease (but not the discovery lease, itself) realize an average abnormal return translating to $315 million in market capitalization. This effect is quantitatively large compared to costs for drilling an exploratory well.

In the final essay, I measure how oil price affects water injection, a method for prolonging the productive lifetime of oil fields. I find that a $1 rise in price increases the water injected into the well's reservoir by approximately 650 to 950 barrels, equalling 7.5 to 9.5% of the mean monthly injection volume (depending on the sample chosen). Equating the estimated price effect with a potential tax effect, this finding has implications for how the government levies a royalty on mature oil fields for which operators invest in pressure maintenance.