Modeling the Discovery of New Natural Gas Reserves

Abstract

Abstract In this paper we have attempted to develop a microanalytical model of new natural gas supply response using a careful analysis of West Virginia geological, petroleum engineering and economic data. The model equations were estimated statistically, using covariance analysis model for pooling cross-sections of time series data. The regression results support the a priori expectations that higher natural gas prices has a positive effect on drilling activities. There is also an indication that expected wellhead price has a positive effect on the finding rate of new reserves. The contentions that increasing tax rate and increasing reserves-production ratio from preferred level have negative effects on drilling preferred level have negative effects on drilling activities were confirmed. The empirical results also show that the margins of substitution in these geologic environments, are not well known. Introduction The natural gas industry in the United States (U.S.) has gone through remarkably changing market conditions, shifting from a shortage situation in the 1960s and 1970s to a surplus in the 1980s. The industry has also operated under many different regulatory environments. The Natural Gas Policy Act (NGPA) of 1978, for example, represents a climax of years of efforts by the U.S. Congress to deal with the natural gas imbalance (supply shortages) of the 1960's and 1970's. The natural gas supply glut of the 1980's can be attributed in part to the 1981–1983 world recession which followed the oil-shock of 1979–80, and the apparent lack of immediate response by the natural gas industry participants. The field prices of natural gas continued to rise, reaching a peak in 1983–84, and natural gas lost its price advantage and faced direct price competition from coal and oil as a primary fuel in the industrial and the electric utilities sectors. In the aftermath of the continuous excess natural gas pipeline deliverability, several attempts to restructure the gas market were made. The Federal Energy Regulatory Commission (FERC) introduced new policy guidelines to make gas markets more flexible policy guidelines to make gas markets more flexible and to make it easier for producers and end-users to interact. Special marketing strategies were also introduced by the industry to recover the gas market share lost to oil and electricity. Because of these efforts, the natural gas market of the 1980s became seemingly more national in outlook, essentially more competitive, and the perception of natural gas availability to the end-users, in general, has changed significantly. However, what has not changed is the level of uncertainty about natural gas market conditions at the wellhead and the relative importance of new gas reserves regarding future availability of gas to endusers. Accurate prediction of the future evolution of the amount of gas to be discovered, changes in new addition to reserves, and new reserves depletion rate continue to be elusive. There are also questions as to how further decontrol of the natural gas industry, will affect natural gas production activities at the wellhead. The overall purpose of this paper is to develop an economic resource supply model of new nonassociated natural gas reserves in West Virginia in the post Natural Gas Policy Act (NGPA) era. The plan of the paper is as follows: First a brief overview of the West Virginia natural gas producing industry is presented. The next section discusses the framework presented. The next section discusses the framework of analysis and references to prior studies underlying the theoretical specification of our model and assumptions. The discussion of the concluding section presents the empirical results and their significance. presents the empirical results and their significance. THE WEST VIRGINIA GAS INDUSTRY The West Virginia natural gas producing industry is one of the oldest in the United States, and was the nation's largest natural gas producer until the 1920's. P. 157