Cutting Costs or Cutting Corners: Asset Reallocation in Oil and Gas Production*

Cutting Costs or Cutting Corners: Asset Reallocation in Oil and Gas Production
with Sarah Armitage and Judson Boomhower

Abstract:
Reallocation of assets across firms can lead to efficiency gains, but it can also lead to distortions via rent-seeking. We examine the link between asset reallocation and rent-seeking enabled by differences in the expected cost of environmental liabilities. Focusing on the US oil and gas industry, we develop a conceptual framework that incorporates both firm specialization in well types and the judgment-proof problem, by which undercapitalized firms can avoid environmental liabilities. We then build a novel dataset with hundreds of thousands of well transfers over 1992 to 2023, showing that oil and gas wells are transferred frequently, particularly as they age and their revenues decline. Moreover, low-value wells are especially likely to be transferred to low-value firms. Transferred wells produce similar amounts in later years, but are less likely to be plugged — thus posing greater environmental risk. We conclude with policy implications related to well plugging, bonding requirements, and decarbonization.

Biography:
Catie Hausman is a Professor in the Gerald R. Ford School of Public Policy at the University of Michigan and a Research Associate at the National Bureau of Economic Research. She is an environmental and energy economist. Some of her recent areas of research include electricity transmission policy; the natural gas sector’s role in methane leaks; the economic damages from climate change; and inequality in pollution exposure.