J.P. Boone r Energy Economics 23 2001 211᎐226 213
the total present value of oil and gas reserves discovered per dollar of US exploration investment, while the sum of the discounted slope coefficients on
current and lagged non-US exploration investment measures the total present value of oil and gas reserves discovered per dollar of non-US exploration invest-
ment.
The empirical estimates indicate that on average, a 1 investment in US exploration activity yields over 7 years cumulative discoveries of oil and gas
reserves worth 2.89 in present value, while a 1 investment in non-US exploration activity yields over 7 years cumulative discoveries of oil and gas reserves worth
10.27 in present value. Furthermore, these present values differ in a statistically significant sense. These results are consistent with the idea that US oil and gas
firms have shifted exploration dollars overseas in search of higher return on investment.
My findings should be of interest to US policymakers, since the appropriate Ž
. response by policymakers if any to the growing reliance on imported oil might
well depend upon the order of magnitude of the difference in returns between US and non-US exploration investment. For example, tax policy might be used to
increase the after-tax returns earned on US exploration investment, and thus, stimulate domestic US exploration, if returns on US exploration investment are,
say, 95 of the after-tax return earned by non-US exploration investment. In contrast, it is unlikely that tax policy could be used to stimulate US exploration
investment if returns on US exploration investment are, say, only 10 of the after-tax return earned on non-US exploration investment. Thus, policymakers
responsible for setting US energy policy should be interested in understanding the magnitude of any differences in returns to US vs. on-US exploration investment if
they are to intelligently devise future energy policy in response to the increased US reliance on imported oil.
2. Assessing the magnitude of the shift abroad in exploration
Data on exploration investment and the value of reserve disclosures are obtained Ž
. from the Arthur Andersen Reserve Disclosures Database ‘AA’ . The AA database
represents an extensive panel set of data taken from the annual financial reports to shareholders of publicly-owned oil and gas firms
1
from the period 1981 to 1996.
1
Ž .
Statement of Financial Accounting Standards No. 19 Financial Accounting Standards Board., 1977 requires that firms disclose as part of their financial report to shareholders the costs incurred during a
financial reporting period to acquire leaseholds for exploration, and the costs of exploring those Ž
leaseholds. Statement of Financial Accounting Standards No. 69 Financial Accounting Standards .
Board., 1982 requires that firms disclose as part of their financial reports to shareholders the present value of their oil and gas assets by discounting at a 10 rate of interest the net revenue from estimated
future production expected to be obtained from the hydrocarbon reserves. Firms are also required to reconcile the beginning-of-year present value measure of oil and gas assets to the end-of-year present
value measure by detailing important sources of change in the measure, including the increment to present value created by reserves discovered in the current financial reporting period.
J.P. Boone r Energy Economics 23 2001 211᎐226 214
This database supplies firm-specific annual data on the following data items: SM PROD
The present value of future net cash flows expected to be
ᎏ
received from oil and gas reserves discovered during the current financial reporting period. Expected net cash flows are dis-
counted at a 10 discount rate. SMOG BOY
The present value of future net cash flows expected to be
ᎏ
received from oil and gas reserves owned at the beginning of the financial reporting period. Expected net cash flows are
discounted at a 10 discount rate WWDRL
Amount invested during the financial reporting period to drill for oil and gas worldwide.
USDRL Amount invested during the financial reporting period to drill
for oil and gas in the United States. WWACQ
Amount invested during the financial reporting period to ac- quire exploration rights to property worldwide.
USACQ Amount invested during the financial reporting period to ac-
quire exploration rights to property in the United States. Ž
. WWOILTRB
Barrels of oil owned by the firm worldwide at the beginning of the financial reporting period.
Ž .
USOILTRB Barrels of oil owned by the firm US only at the beginning of
the financial reporting period. The 1997 Annual Energy Review prepared by the Energy Information Adminis-
tration provides data on oil imports as a fraction of total US oil consumption Ž
. IMPORT . Descriptive statistics on data obtained from both datasets appear in
Table 1. As noted above, exploration activity has shifted abroad while imports of oil have
increased as a fraction of total US oil consumption. Figs. 1᎐3 provide some insight into these shifts. Fig. 1 shows that IMPORT has increased from a low of about 0.27
Ž .
or, 27 in the early 1980’s to a recent high of 0.46. Fig. 2 shows that exploration Ž
dollars invested in US exploration USEXPL, defined as the sum of USDRL and .
Ž USACQ by the sample firms as a fraction of worldwide exploration WWEXPL,
. defined as the sum of WWDRL and WWACQ has decreased from around 0.65
Ž .
or, 65 in the early 1980’s to about 0.40 in recent years. Fig. 3 shows that US oil Ž
. Ž
. reserves USOILTRB as a fraction of worldwide oil reserves WWOILTRB
Ž owned by the sample companies decreased during the period from about 0.55 or,
. 55 to about 0.42. Finally, Fig. 4, an overlay of Figs. 1᎐3, reveals the clear
intertemporal association between reduced US exploration investment, reduced holdings of US reserves, and increased reliance on imported oil.
I evaluate the statistical significance of these trends by estimating the following regression model in which the slope coefficient on TIME forms a test of the null
Ž hypothesis that the dependent variable, Y, either IMPORT, USEXPLrWWEXPL,
. USOILTRBrWWOILTRB has not changed across time.
J.P. Boone
r Energy
Economics 23
2001 211
᎐ 226
215 Table 1
a
Ž .
Descriptive statistics means
b
Ž .
Year N
SM PROD SMOG BOY
WWEXPL USEXPL
FEXPL WWOILTRB
USOILTRB IMPORT
ᎏ ᎏ
1981 43
nra nra
15097.35 12142.49
2954.86 7228.67
4378.33 33.6
1982 47
nra nra
413.30 11961.38
3451.91 7164.40
4499.04 28.1
1983 54
nra nra
11829.24 8755.39
3073.85 3073.85
4786.02 28.3
1984 49
32055.76 147155.00
13173.94 7824.90
5349.04 12055.82
5331.33 30.0
1985 49
24441.06 161536.47
13556.88 7079.41
6477.47 13027.22
5351.24 27.3
1986 49
13865.02 169119.24
8084.49 3205.73
4878.76 13707.43
5948.12 33.4
1987 49
18533.06 131699.90
6536.39 2682.35
3854.04 13602.31
5556.37 35.5
1988 49
30184.43 146533.35
9976.08 4103.47
5872.61 14591.82
5383.04 38.1
1989 106
15403.24 139048.48
7031.50 3760.13
3271.37 13304.98
7636.46 41.6
1990 114
29735.67 159261.85
9610.97 5731.74
3879.24 13701.44
7885.49 42.2
1991 141
18452.47 194591.43
9338.62 5707.15
3631.47 15240.46
8623.60 39.6
1992 148
22561.81 153187.31
7634.11 4327.67
306.45 16339.22
9177.55 40.7
1993 148
19948.57 166255.30
6953.59 3532.03
3421.55 17963.32
10205.39 44.2
1994 115
25654.84 171660.05
7469.77 4920.67
2549.1 21735.65
13043.17 45.5
1995 105
32123.24 190120.03
8581.24 5746.04
2835.2 23950.22
15823.88 44.5
1996 90
62983.44 223269.77
11908.68 8494.32
3414.36 25266.18
17549.5 46.4
a
Note: all amounts are in thousands.
b
SM PROD is the present value of future net cash flows expected to be received from oil and gas reserves discovered during the current financial
ᎏ
reporting period. Expected net cash flows are discounted at a 10 discount rate; SMOG BOY is the present value of future net cash flows expected to be
ᎏ
received from oil and gas reserves owned at the beginning of the financial reporting period. Expected net cash flows are discounted at a 10 discount rate; WWDRL is the amount invested during the financial reporting period to drill for oil and gas worldwide; USDRL is the amount invested during the financial
reporting period to drill for oil and gas in the United States; WWACQ is the amount invested during the financial reporting period to acquire exploration rights to property worldwide; USACQ is the amount invested during the financial reporting period to acquire exploration rights to property in the United
Ž .
States; WWOILTRB is the number of barrels of oil owned by the firm worldwide at the beginning of the financial reporting period; USOILTRB is the Ž
. number of barrels of oil owned by the firm US only at the beginning of the financial reporting period; FOILTRB is WWOILTRB-USOILTRB; WWEXPL
is the sum of WWDRL and WWACQ; USEXPL is the sum of USDRL and USACQ; FEXPL is WWEXPL-USEXPL; and IMPORT is US oil imports as a fraction of total US oil consumption.
J.P. Boone r Energy Economics 23 2001 211᎐226 216
Fig. 1. Oil imports as a fraction of total oil consumed in US.
Ž . Y s ␣ q ␣
TIME q 1
t 1
t
TIME is a time trend variable assigned a value of 1 if the observation occurred in 1981, a value of 2 if the observation occurred in 1982, and so on.
The adjusted R
2
from the regression in which the dependent variable is Ž
. Ž
. IMPORT is 0.83, and the slope coefficient t-statistic on time is 0.0128 8.71 and
statistically different from zero at the 0.001 level of significance. The adjusted R
2
from the regression in which the dependent variable is USDRLrWWDRL is 0.80, Ž
. Ž
. and the slope coefficient t-statistic on time is y0.02767 y7.87 and statistically
different from zero at the 0.001 level of significance. Finally, the adjusted R
2
from the regression in which the dependent variable is USOILTRBrWWOILTRB is
Ž .
Ž .
0.74, and the slope coefficient t-statistic on time is y0.01402 y6.74 and
Fig. 2. US exploration investment as a fraction of total worldwide exploration investment.
J.P. Boone r Energy Economics 23 2001 211᎐226 217
Fig. 3. US oil reserves as a fraction of worldwide oil reserves.
statistically different from zero at the 0.001 level of significance. These simple time-trend regressions suggest that US reliance on imported oil has increased
Ž . across time while 1 the dollars invested to develop oil and gas reserves in the US;
Ž . and 2 US oil reserves as a fraction of worldwide oil reserves have both decreased
across time. Each of these trends is consistent with the idea that reduced US exploration investment may have contributed to increased reliance on imported oil.
The question this paper seeks to answer is whether lower returns on US ex- ploration investment, relative to returns earned on non-US exploration investment,
Fig. 4. Overlay of Figs. 1᎐3.
J.P. Boone r Energy Economics 23 2001 211᎐226 218
might explain the migration of exploration capital abroad. The following section describes the empirical model used to help answer this question.
3. Empirical model used to estimate the present value of exploration investment
