The Economics of the West Virginia Natural Gas Exploration and Production Industry, 1977-1987

Abstract In this paper, the structure, conduct and performance of the West Virginia natural gas producing performance of the West Virginia natural gas producing industry is discussed. The competitiveness of the gas industry is measured empirically using the concept of concentration ratio and other features of industry structure. Trend analysis of the industry activities and outcomes shows no evidence of "market power" among West Virginia gas producers. The general drilling trends in West Virginia paralleled those of the entire U.S. Similarly, the trends in new gas discoveries, real wellhead price, gas exploratory drilling, to a large extent, are closely related. It was noted, however, that oil and gas operators in West Virginia took less risk in exploratory drilling between 1981-1987. It would appear that more exploration activities must be undertaken to reverse the current downward trends in new reserve additions in the 1990s. Introduction The development and utilization of natural gas resources from "in situ" deposits to end-users follow four sequential economic phases. These phases of natural gas development represent different aspects of a rather complex industry. Each aspect is a distinct, yet an interdependent economic stage with different regulatory environments and market conditions. The economic analysis conducted in this paper is focused primarily on natural gas exploration and production stages of the West Virginia natural gas production stages of the West Virginia natural gas industry. The exploration phase represents the supply aspect of the field market, and the production stage depicts the demand aspect. The exchange commodity is new gas reserves. The analytical framework used in this paper is based upon the concept of concentration ratio and other key characteristics of industry structure— those features of the business firm that conditions the firm's behavior. First, the concept of concentration ratio is operationally defined. Second, other key indicators of industry performance are evaluated to determine the existence/presence of any anticompetitive behavior among oil and gas producers in West Virginia. An investigation of the implication of vertical integration on gas resource accessibility, extractive capacity, and production outlet is conducted to detect any evidence of absolute monopoly power for integrated gas operators in the state. Finally, a market analysis of new natural gas reserves is performed. The key factors, market determinants and performed. The key factors, market determinants and exchange commodity in the reserve market are identified and examined. WEST VIRGINIA NATURAL GAS PRODUCING INDUSTRY The West Virginia natural gas producing industry is characterized by many small and middle-sized operators. Approximately 90-95% of industry activity in West Virginia is done by "independent" producers. The extent of industry competitiveness may, however, be ascertained empirically using the concept of concentration ratio and other elements of market structure. The concept of concentration ratio has been operationally defined as the percentage of assets, value added, or output accounted for by a specified number of the largest companies in an industry. The higher the concentration ratios for the top four or top eight companies in an industry the greater the monopoly power. In Table 1, the concentration ratios presented are defined in terms of cumulative exploratory footage drilled, cumulative completed wells, and accessibility to remaining petroleum resources. The reported activity for the top four and top eight oil and gas operators in West Virginia covers the period between 1977 and 1987.Table 1 shows that drilling and production activities in West Virginia have become less structurally concentrated. P. 197