MODELS OF EXPLORATION FOR OIL AND NATURAL GAS

This thesis is primarily concerned with modeling exploration for oil and natural gas as an information-gathering activity and examining the implications of this characterization for the way in which firms make drilling decisions. The drilling of prospects produces a joint product, the discovery of a deposit of a certain size and geological information that is relevant to the evaluation of other prospects in the area. Hence exploration is viewed as an investment process with learning. This view is shown to be crucial for understanding how the industry chooses to develop an area suspected of containing oil and natural gas deposits. Firms that ignore the information value of drilling outcomes make quite different investment decisions from firms that take this information into account. The demonstration of this fact and its importance from econometric models of exploration is one of the two main themes of this thesis. The second consists of examining the efficiency of the industry in exploring the geographical region and evaluating the public policies designed to improve the market performance.