Abstract
This paper introduces a model that distinguishes between the physical and geological availability of reserves. The former concerns the total amount of reserves that can be extracted whereas the latter focuses on the intensity with which the geology of producing reservoirs limit desired extraction. We apply the model in rationalizing why the US oil industry’s number of exploratory wells drilled were decreasing in reserves while developmental wells drilled were increasing in reserves over the period 1955-2002. Our results indicate that these trends can be rationalized by a phase of extraction where reserves are getting physically depleted but the geological constraint is relatively lax. During this phase, the marginal value of known producing reserves is rising while the marginal value of developmental drilling in augmenting extraction is falling. As such, producers substitute developmental for exploratory drilling with reserve depletion.
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