Exploration economics in a regulated petroleum province: The case of the Norwegian Continental Shelf

Abstract

Reserve replacement remains a key challenge for the international oil and gas companies. As market-oriented oil and gas provinces are maturing, exploration activity is shifted towards the resource-rich, regulated regimes outside the OECD. Regulated oil and gas provinces remain under-explored also in econometric terms. In this paper, we specify and estimate an econometric model of exploration and appraisal drilling for the highly regulated Norwegian Continental Shelf (NCS) over the period 1965 to 2004. Explanatory variables include the oil price, cumulative discoveries and open exploration acreage. Estimated error-correction models account explicitly for sluggishness and short-term adjustments in exploration drilling. We find robust long-term oil price effects on exploration activity, whereas the short-term response is muted. On the other hand, the temporary influence on exploration drilling from licensing rounds for new exploration acreage is significant, and so are the feedback effects from historical exploration success. At the same time, the longer-term impact of these variables is more moderate.