Competing Factors Influencing Investments in the International Oil and Gas Industry: Empirical Evidence from OPEC Countries

Abstract

The main objective of this dissertation is to investigate the influence of various competing economic, uncertainty/field performance, technical, and petroleum fiscal policy factors in driving exploration and development investments in the international oil and gas industry. Investment behaviour equations (exploration and upstream for both OPEC and selected non-OPEC countries respectively) were specified and estimated in panel data framework using fixed and random effects models during the period 1980 – 2011. Consequently, Driskoll and Kraay (1998) parametric covariance matrix estimator and Baltagi and Wu (1999) generalized least square estimator were respectively applied for the most suitable fixed and random effects models to adjust for standard errors in the estimated coefficients. The estimated results of the exploration and upstream investments behaviour models generally show good fitness, robustness, and strong statistical performance with expected signs in most of the tested relationships. The estimated coefficients of the exploration investment behaviour model convey significant positive influences of oil price, production, reserves replacement, and geological potential as well as significant negative influence of oilfield depletion rate on exploration investment in OPEC countries. This indicates the importance of economic and uncertainty factors on exploration investment behaviour in OPEC. The exploration investment model for non-OPEC shows the significant positive influences of oil price, reserves replacement rate, geological potential, and significant negative influence of cost. This also indicates the significant influences of economic and uncertainty factors on exploration investment behaviour in non-OPEC. In terms of impact, exploration investment show elastic response to increases in oil production and oil price in OPEC and increases in oil price and cost for non-OPEC respectively. This suggests the significant influence of economic factors on exploration investment in both OPEC and non-OPEC countries. Similarly, the estimated results of the upstream investment behaviour model for OPEC countries show significant positive influences of oil price, production, reserves replacement rate, technological progress, and on the other hand, significant negative influences of oilfield depletion rates and gas rent respectively. This suggests the importance of economic, uncertainty, technical, and petroleum fiscal policy factors (natural fiscal regimes) on upstream investment in OPEC. Conversely, the estimated coefficients of the non-OPEC upstream investment model display significant positive influences of oil prices and technological progress as well as negative significant influences of oil and gas rents respectively. This also indicates the significant influence of economic, technical and petroleum fiscal policy factors in shaping upstream investment behaviour in non-OPEC. In terms of overall impact, upstream investment show significant elastic response to increases in oil price and technological progress in both OPEC and non-OPEC respectively suggesting the importance of economic and technical factors on upstream investment. The findings of this study suggest that the market development policies of both OPEC and non-OPEC are to favour high oil price increases to offset for rising industrys costs in order to justify economics of oil and gas exploration, development and production ventures, reduce rate of return on investment and increase in cash flow. Furthermore, significance of technological progress on upstream investment indicates the important role of technological advancements for the growth of oil and gas industry. Therefore, both OPEC and non-OPEC countries are to focus on policies to support and encourage major R&D initiatives in the industry and also provide necessary policy framework for effective development of petroleum industry (sectoral) innovation systems and spur technological development. Production control policies are also desirable to encourage field development and redevelopment investments in both OPEC and non-OPEC, while such policy could retard exploration investment in OPEC countries. Similarly, the results also imply that the depletion strategy of OPEC countries is to favour resource conservation policies to encourage exploration investment while resource conservation policies will slow down investment in field development and redevelopment. In the same context, policies to target increase in reserves replacement ratio are desirable to encourage exploration investment in both OPEC and non-OPEC. Furthermore, it is worth noting that increases in the fiscal regimes has the capacity to decelerate the level of investments in both OPEC and non-OPEC countries. Consequently, succinct and careful sharing of risk and reward mechanisms is desirable when designing fiscal regimes to avoid frequent changes, encourage investments and long term value addition to host both the government and the investors.