Physical and Economic Performance Measures in Petroleum Lease Sales & Development: A Case Study of the U.S. Gulf of Mexico Region, 1983-1999

Abstract

Abstract This paper characterizes and analyzes petroleum lease sales and development in the U.S. Gulf of Mexico OCS using estimated physical and economic measures of performance in offshore petroleum lease development. The physical performance measures we estimated include lease prospectivity index, lease expeditious index and lease development productivity. In addition, we estimated two economic performance measures, which are profitability index and internal rate of return. Empirical analysis of lease specific data suggests the Gulf OCS is just as attractive to the big four oil and gas integrated firms as it was two decades ago. However, there is evidence of influx of new active players in petroleum lease development in the region than two decades ago. There is also strong evidence from lease prospectivity results, which suggests that the risk of lease development failure rises with firm size and water depth leases. Regarding lease development productivity, we find that a declining pattern in productivity with firm size from big to small and a declining productivity trend over time are unmistakable. Further, there is evidence of rising lease development productivity with water depth. For all categories of leases, the productivity rate in the early 1980s was significantly higher than productivity rate in the early 1990s, notwithstanding the fact that more leases were issued and drilled in the 1980s than in the early 1990s. In general, our estimated measures of aggregate economic performance, the profitability index and internal rates of return are relatively low in comparison to returns in the manufacturing sector during the period. The reported low profitability measures, notwithstanding, we find that aggregate annual average rate of return on all leases issued from 1983-1994 increases with water depth and across time. The same pattern, however, is not evident in the late 1990s, probably because of data limitations. Also, the aggregate average rate of return increases with firm size leases in the 1980s, but no definitive trend is apparent across firm size in the 1990s.