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Suboptimal producer behavior: Evidence from the Permian basin

Mann, Lein; Myhre, Viktor
Master thesis
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URI
http://hdl.handle.net/11250/2580308
Date
2018
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  • Master of Science [1116]
Abstract
In this master thesis we examine to what extent shale well producers in the

Permian basin respond flexibly in terms of allocating output intertemporally to

price incentives. We use an extensive panel data based on micro data set provided

by Rystad Energy dating back to 2000 until the end of 2017, which covers more

than 13,000 shale wells. Our data indicate that producers are forward-looking and

trade off production today for production in the future. More specifically, our

main finding is that when the 3-month future spot spread increases by 10% well

operators in Permian shift up production by 6.35%, which is significant at a 5%-

level. This result also contradicts previous literature, which found other shale

producers to shift production down or respond insignificantly to similar price

incentives. According to our results, producers in Permian behave in a suboptimal

manner, which opposes the Hotelling rule. We argue that these results are due to

Permian’s explosive growth compared to other U.S. shale regions in recent years,

driven by easy access to investor funding and management incentives related to

production growth.
Description
Masteroppgave(MSc) in Master of Science in Business, Economics - Handelshøyskolen BI, 2018
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Handelshøyskolen BI

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