Counterfactual analysis of compulsory unitization as a solution to the common pool externality in the oil and gas industry

The exploitation of a single oil field by several firms is a typical example of the common pool externality (CPE). As a possible solution to it, regulators have innovated policies that allow such firms to coordinate by selecting a single operator to exploit the whole field. Moreover, every state, but Texas, can even force firms to join a coalition. In this dissertation I analyze the dynamic strategic interaction of firms competing for common resources. By modeling such dynamic interactions, I will be able to counterfactually assess what would happen under different regulatory scenarios. I use the model, along with other techniques, to quantify the loss in production and profits due to the common pool externality; then I explore how implementing different policies that promote or enforce coalition formation would change productivity and welfare. This research is has three main parts. In Chapter 2, I explore the most important institutional details, and simulate how the characteristics of a reservoir, the composition of the hydrocarbons, and the distribution of firms in a field affect the outcome of coordination. In Chapter 3, I use different reduced form techniques to estimate how implementing compulsory unitization in New Mexico has improved welfare. In Chapter 4, I develop a random stopping model and estimate the parameters using the methodology developed by Bajari and Levin, 2007. Once the parameters of the model are estimated, I will be able to explore my different research questions. The results suggest that relaxing the restrictions in voluntary unitization would increase welfare at a lesser scale than implementing compulsory unitization. Nevertheless, none of these policies will nullify the entire negative effect caused by the common pool externality.