Collaborative Research: Productivity, Efficiency, and Distortions in the U.S. Shale Boom

Boston College, Chestnut Hill MA

Investigators

Abstract

Abstract Widespread improvements in the productivity of hydraulic fracturing and horizontal drilling (fracking) have dramatically reshaped U.S. energy markets, unlocking nearly $1 trillion of previously uneconomic shale oil and gas reserves. This project develops a detailed database that links data on mineral leases and well-level drilling and production in the U.S. The project then uses this database to document the causes of productivity growth in the U.S. shale business and measure barriers to further improvements in efficiency. This research examines how firms economic and contractual environment shapes oil and gas productivity and resource allocation. By combining evidence across multiple U.S. shale plays, the project will provide the first large-scale evidence of how changes in the efficiency of the industry have affected U.S. oil and gas markets. Moreover, the construction of the database is a valuable contribution that substantially facilitates the entry of future researchers into empirical work on the U.S. oil and gas industry. The first study will quantify the economic distortions generated by contractual features in mineral leases, which are agreements between oil and gas firms and private landowners. This research studies how primary term and royalty clauses in mineral leases affect firms? drilling decisions and measures their aggregate impact on hydrocarbon supply. The second study will measure the effect of oil and gas price booms and busts on productivity growth. Many industry participants argue that productivity improvements are greatest during a bust, due to the freeing up of human capital from day-to-day drilling activity. This argument runs counter to standard models in which productivity improvements are most valuable and therefore undertaken when prices are high. This project will provide the first empirical evidence as to when large productivity improvements actually occur in the shale industry. The third study will explore the wide distribution of firm size in U.S. shale business, which is suggestive of important differences across firms in productivity, and the scope for misallocation of mineral assets. This study will measure the productivity of firms and parcels and then characterize the conditions under which inefficient allocations are generated and persist. Overall, these projects will advance the knowledge on economy-wide productivity and misallocation. The oil and gas industry provides an ideal setting to study these questions because data on both investment and investment outcomes are available at the level of the individual investment. Further, the database linking information on drilling, completions, and production to mineral leases allow for identification in this setting. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.