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Energy Economics 23 2001 211᎐226
Empirical evidence for the superiority of non-US oil and gas investments
Jeff P. Boone
U Mississippi State Uni
¨
ersity, P.O. Drawer EF, Mississippi State, MS 39762-5661, USA
Abstract
This paper provides empirical estimates of the return on US and non-US exploration investment. The estimates are obtained from a polynomial distributed lag model
w Ž
. x
Econometrica 33 1965 178 that relates the present value of current period reserve discoveries to current and lagged US and non-US exploration investment. The empirical
evidence presented in the paper indicates that the net present value of 1 invested in non-US exploration is larger in a statistically significant sense than the net present value of
1 invested in U.S exploration. In particular, results indicate that the return on non-US exploration investment is approximately 3.5 times as large as the return earned on US
exploration investment. The results reported in this paper provide insights potentially useful to US energy policymakers. 䊚 2001 Elsevier Science B.V. All rights reserved.
Keywords: Empirical; Oil; Gas; Investments
1. Introduction
Over the past 15 years, US oil and gas firms have shifted exploration investment away from US domestic drilling to non-US drilling. During the same period,
imports of oil from non-US sources have increased as a percentage of total US oil consumption. When juxtaposed, these two trends portray a troubling picture of
increased vulnerability to imported oil that will likely continue for the foreseeable future.
This shift in exploration investment has been explained as a response to several
U
Tel.: q1-662-325-1634; fax: q1-662-325-1646. Ž
. E-mail address:
jboonecobilan.msstate.edu J.P. Boone . 0140-9883r01r - see front matter 䊚 2001 Elsevier Science B.V. All rights reserved.
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PII: S 0 1 4 0 - 9 8 8 3 0 0 0 0 0 7 3 - 6
J.P. Boone r Energy Economics 23 2001 211᎐226 212
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factors, including 1 the need to diversify exploration portfolios; 2 the opening to international investment of large, geologically attractive areas in formerly socialist
Ž . countries; 3 the difficulty of maintaining or increasing reserve values in mature
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exploration provinces, including the United States; 4 lower ‘finding costs’; 5 Ž .
improved contracting terms with non-US governments; 6 lower foreign tax rates; Ž .
Ž and 7 reduced US tax incentives for exploration Amoco Corporation, 1990; US
Department of Energy and Energy Information Administration, 1991; Bertagne .
1988; Wasteneys 1997 . Economic theory would suggest that exploration capital has migrated abroad because risk-adjusted returns to exploration capital invested
outside the US are greater than returns earned on exploration capital invested Ž
. inside the US Eiteman and Stonehill, 1986 . Furthermore, the desire to gain entry
into non-domestic exploration provinces is thought to be a causal factor in stimulating the recent wave of mega-mergers in the petroleum industry in general
Ž .
Ž Weston et al., 2000 and the merger of Total and Petrofina in particular Oil and
. Gas Journal, 1998 .
Prior research has indirectly addressed the issue of whether capital migrates abroad in search of higher returns on investment by examining returns earned by
shareholders, based on the assumption that higher returns on real investment will Ž
. be reflected in higher returns to shareholders. Fatemi 1984 compares the stock
returns of US multinational corporations to stock returns of US uninational corporations and concludes that both multinational and uninational corporations
provide shareholders identical risk-adjusted returns, implying that returns to US real investment are the same as returns to non-US real investment. Griffian and
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Karolyi 1998 document that much of the variation in stock returns earned by shareholders in non-US oil and gas firms is attributable to a strong industry effect
rather than to a strong country effect. Since one would normally expect any inter-country variation in returns to real oil and gas investment also to be reflected
in a strong country effect in stock returns, these findings suggest the possibility that returns to real oil and gas investment do not differ markedly by country. In
summary, the extant research provides indirect evidence that is inconsistent with the idea that exploration capital has migrated abroad in search of higher returns
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on investment. However, there is no research of which I am aware that directly tests for differences in returns to US vs. non-US exploration capital.
The purpose of this paper is to document the magnitude of the differences in returns to US exploration investment as compared to returns to non-US ex-
ploration investment. In particular, I empirically estimate the net present value of oil and gas reserve discoveries per dollar invested in US exploration and compare
that estimate to the estimated net present value of oil and gas reserve discoveries per dollar invested in non-US exploration. Empirical estimates of these net present
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values are obtained from a polynomial distributed lag model Almon, 1965 that relates the present value of reserve discoveries to current and lagged US and
non-US exploration investment. The model is estimated as a two-way fixed-effects panel model for a sample of oil and gas firms using data from the period
1981᎐1996. The sum of the discounted slope coefficients on current and lagged US exploration investment that is obtained from the distributed lag model measures
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
