Abstract
Predictions from the original geophysical approach to oil exploration and production suggest that oil production will develop according to a predetermined and inflexible bell-shaped trajectory, quite independent of variables relating to technological development, economics, and policy. Exploring the potential sources of elasticity in oil reserves and production, this paper offers a modification to the geophysical approach. Based on economic theory and modern empirical research the results suggest that both reserve-generation and production are indeed influenced by factors and forces of technology, economics, and government regulation.
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Notes
- 1.
The so-called Hubbert’s peak was (quite successfully) applied to predict that US oil production would reach its maximum around 1970. The same concept has inspired the current debate of Peak Oil, with high-spirited discussions about when the world’s oil production will peak.
- 2.
A popular analogy is found in the classic board game “Battleship”. In the early phases of the game, with many ships on the board, expected rewards from bombing are high, with major learning effects involved whenever a new ship is hit. However, expected marginal gains, as well as learning effects, drop towards the end of the game, when the majority of ships have been sunk.
- 3.
According to BP’s Statistical Review of World Energy 2007.
- 4.
According to BP’s Statistical Review of World Energy 2007.
- 5.
See Smith (2005) for a critical overview of empirical studies of OPEC behavior.
- 6.
Capital requirement along the value chain include investments in exploration activities, field development, efforts to increase oil recovery, processing and transport facilities, and potentially also marketing activities.
- 7.
A non-commercial discovery (Balder) was actually made by Exxon (Esso) already in 1967. However, it took 30 years of technological development to mature this discovery into a profitable field development project based on subsea templates tied back to a floating production and storage vessel. The Balder field was put on stream in 1999 and is still producing (mid 2008).
- 8.
An exploration play is a geographically bounded area where a combination of geological factors suggests that producible petroleum can be discovered. The three most important factors are (1) a reservoir rock where petroleum can be preserved, (2) a tight geological structure (a trap) that covers the reservoir rock, and (3) a mature source rock containing organic material that can be converted into petroleum (:̧def :̧def Norwegian Petroleum Directorate 2007).
- 9.
In testing of statistical hypotheses, the probability value (p-value) of a parameter estimate represents the likelihood of obtaining a result as extreme as the one obtained through our estimation, given that the null hypothesis is through. In our notation (p = 0. 00), the implication is not that the p-value of this parameter estimate is actually 0, but that it fails to break zero at the two-digit cutoff level of measurement.
- 10.
As opposed to frontier exploration areas, mature areas are typically characterized by proven exploration models, producing fields, well-developed infrastructure, transport facilities and market access. Moreover, exploration activities in these areas are usually directed at smaller satellite fields which can be tied back to already producing facilities of larger reservoirs (in decline), without the large investments involved by stand-alone field developments in new oil and gas regions (:̧def :̧def Norwegian Petroleum Directorate 2007).
- 11.
With a long-term perspective on the production process, all inputs may be seen as variable. Consequently, the capital stock can be included in both the L and the H vector, depending on the horizon of the decisions in question.
- 12.
To test the validity of this assumption, a variety of interest rate and labor cost variables were included in preliminary estimations. However, plausible and robust estimates could not be established for any of their coefficients.
- 13.
The error-correction specification would normally also include changes in model variables. However, these proved insignificant in preliminary estimations, and are therefore left out for simplicity of exposition. The constant term is also removed for the same reason.
- 14.
- 15.
R 2 also has a range of weaknesses with respect to model evaluation. The inclusion of additional variables will never reduce the value of R 2, and it may improve even if nonsense variables are adjoined. Moreover, R 2 also depends on the choice of transformation of the dependent variable (for example, Δy versus y). R 2 may therefore be misleading for model evaluation purposes.
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Mohn, K. (2010). Elastic Oil: A Primer on the Economics of Exploration and Production. In: Bjørndal, E., Bjørndal, M., Pardalos, P., Rönnqvist, M. (eds) Energy, Natural Resources and Environmental Economics. Energy Systems. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-12067-1_3
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