Information and Strategic Decision-Making in the Oil and Gas Industry: An Empirical Assessment

Citation

Zhang, Mali (2018) Information and Strategic Decision-Making in the Oil and Gas Industry: An Empirical Assessment. Dissertation (Ph.D.), California Institute of Technology. doi:10.7907/3GAD-4Z16. https://resolver.caltech.edu/CaltechTHESIS:05172018-154911560

Abstract

This dissertation comprises three essays addressing questions from Industrial Organization Economics concerning the oil and gas industry. The essays offer substantive contributions to the study of joint decision-making (Chapter 2), extrapolative beliefs (Chapter 3), and auctions (Chapter 4).

Chapter 2 investigates the quality of joint operations, where multiple oil and gas companies explore a piece of land together. By developing a discrete-choice model which can be matched to actual drilling data, I show that joint operators consisting of only large companies have the least accurate signals. Further counterfactual analyses show that the best policy governing joint operations depends on government priority: to maximize revenue or to avoid damage to the environment.

Chapter 3, co-authored with Lawrence Jin and Matthew Shum, presents a model of dynamic investment and production in which producers over-extrapolate recent demand conditions into the future. We show theoretically and empirically that, in a volatile industry, these biased beliefs can be beneficial in the long-run by counteracting the general trend in the industry. Calibration of our model to Alaska oil exploration shows that the cushioning effect can be large in reducing price decline and accelerating price recovery.

Chapter 4 examines whether common value or private value auction model best describes the bidding decisions made by oil and gas companies. The common value model suggests that more competition can lead to lower equilibrium bids from bidders and lower revenue. By analyzing tract auction data from Alaska, I find that common value components play a slightly larger role when observable heterogeneity is removed. However, expected revenue still increases with competition and plateaus when competition becomes sufficiently high.

Thesis Files