Abstracts: 2003

Modeling the Economic Impacts of Offshore Oil and Gas Activities in the Gulf of Mexico: Methods and Applications.
Recent changes in oil and gas activities on the Gulf of Mexico (GOM or Gulf) Outer Continental Shelf (OCS) have sparked interest in the economic impact that these activities have on coastal regions. Over the past several years, the MMS has initiated a number of different research projects of increasing degrees of sophistication, attempting to examine the relationship between OCS activity and the socioeconomic environment of coastal regions on the GOM. Recent MMS approaches have included the use of a common methodology known as Input-Output (I-O) modeling. I-O models examine relationships between industries and other economic agents within an economy. The mathematical formulae used to construct an I-O allow a researcher to simulate the effects that a change in one or several economic activities has on the entire economy.
A shortcoming with most I-O analysis is that the impact drivers (or multipliers) in the model are typically taken from sampled, nation-wide survey data. One primary driver in these models is the production function (or cost function) matrix that is an industry-specific calculation dividing commodity-specific input expenditures by total commodity input expenditures. These ratios are generally calculated from nationally, rather than regionally, relative production expenditure profiles. Such an approach assumes that industries in any given area will use inputs in the same proportion as the national average. For oil and gas firms operating on the Gulf OCS, this assumes that input expenditures are made in the same proportion as the national oil and gas industry average. Such an approach averages production costs shares from such varied regions as Alaska to the offshore GOM.
This report addresses a number of methodological shortcomings in the application of I-O analysis to the oil and gas industry. Our report presents examples of how the two approaches present differing empirical conclusions and why some modifications are in order. We offer a number of practical and applied alternatives to existing methods, as well as suggestions on improving production function and other standardized input data, to improve the understanding of how the oil and gas industry impacts coastal communities. We use coastal Louisiana as a case study for examining the implications of our work.

Onshore Effects of Offshore Petroleum Production: a Case Study of the U.S. Gulf of Mexico Outer Continental Shelf (OCS) and the Louisiana Economy.
In this paper, the effects of changes in the price of crude petroleum and offshore crude petroleum production in the U.S. Gulf of Mexico Outer Continental Shelf (OCS) on the Louisiana economy are investigated. The main hypothesis is that the impact of oil price on Louisiana economic aggregates would mostly be positive keeping in perspective rising oil and gas industry activity. Our results reaffirm the common perception that a rising oil price stimulates economic growth in oil-exporting states. The converse is also found to be true for a declining oil price. The study shows that oil price variation affects the Louisiana economy in a statistically significant way. The average price responsiveness of unemployment rates, state revenue, personal income and offshore OCS production is elastic. This means that a one percent change in price generally leads to more than one percent change in petroleum production and subsequent changes in Louisiana economic indicators. In a "quantitative equivalence" sense, a one percent rise in price leads to about two-tenths of one percent drop in average quarterly Louisiana unemployment rate; about $675,000 increase in quarterly personal income; $0.75 billion in annual state revenue; and about 3.278 MMBOE increase in quarterly petroleum production, ceteris paribus.

A Generalized Modeling Framework for Public Benefit Fund Program Valuation.
A generalized modeling framework to value Public Benefit Fund (PBF)programs is developed. The potential economic and environmental impact associated with PBF programs at the state-level is described through a simulation model that values energy savings and emissions reduction and an input-output model that estimates the total economic benefit of the program. The valuation strategy is based on publicly-available data and infer results under a reasonable assumption set. The methodology is illustrated through a case study for a proposed PBF program targeted for Louisiana across the residential and commercial sector.

LIHEAP Reauthorization: Is the Time Right for a Formula Fight?
During reauthorization of the Low-Income Home Energy Assistance Program, Congress and the Bush administration will need to address the issue of whether the allocation mechanism used to distribute LIHEAP funds should be revised. Defenders of the status quo argue that even debating this issue could destroy political consensus on LIHEAP and lead to reduced funding or abolition of the program. Proponents of change maintain the current formula is grossly inequitable.

Southeastern Louisiana's Shallow Gas Potential: E&P Opportunities for the Independent Operator.

In the Louisiana coastal areas south of Lake Pontchartrain and in the offshore waters to the east, deep Miocene - Oligocene sands have been prolific producers of hydrocarbons. Also, the subsurface of southeastern Louisiana's "Florida Parishes" area north of Lake Pontchartrain and east of the Mississippi River is known for its Upper Cretaceous (Tuscaloosa) production. However, little attention has been given to the gas potential of the Miocene interval located beneath the thick (2000-3500 feet or 610-1067 meters) Plio-Pleistocene fresh water aquifer and above the Oligocene Heterostegina limestone and Frio interval.
Preliminary regional mapping of the Miocene interval shows that it thickens to 4000 feet (1220 meters) in a southerly direction. The interval, consisting mostly of fluvio-deltaic, stacked distributary channels, has a high sand/shale ratio (>60%). By applying standard log correlation techniques, the Miocene sequence is divided into 4 correlatable units each of which contains gas reservoir sands. The underlying Oligocene Frio interval consists mostly of shallow water marine deposits and its uppermost sand is a gas reservoir. Both Miocene and Upper Oligocene gas appear to be biogenic methane similar to that found up-dip in Mississippi and in coastal Alabama. The methane source is from interbedded lignites located within this interval. Reported production from the sands has ranged between 100 and 600 thousand cubic feet per day (3-18 thousand cubic meters per day). The overall geologic framework is presented with particular emphasis placed on illustrating the depositional environments and trapping mechanisms associated with these shallow gas reservoirs. These mechanisms are mainly stratigraphic in nature with a minor structural component in some areas.

Shallow Miocene and Oligocene Gas Potential: Southeastern Louisiana's Florida Parishes.
In the Louisiana coastal areas south of Lake Pontchartrain and in the offshore waters to the east, deep Miocene - Oligocene sands have been prolific producers of hydrocarbons. Also, the subsurface of southeastern Louisiana's "Florida Parishes" area north of Lake Pontchartrain and east of the Mississippi River is known for its Upper Cretaceous (Tuscaloosa) production. However, little attention has been given to the gas potential of the Miocene interval located beneath the thick (2000-3500 feet or 610-1067 meters) Plio-Pleistocene fresh water aquifer and above the Oligocene Heterostegina limestone and Frio interval.
Preliminary regional mapping of the Miocene interval shows that it thickens to 4000 feet (1220 meters) in a southerly direction. The interval, consisting mostly of fluvio-deltaic, stacked distributary channels, has a high sand/shale ratio (>60%). By applying standard log correlation techniques, the Miocene sequence is divided into 4 correlatable units each of which contains gas reservoir sands. The underlying Oligocene Frio interval consists mostly of shallow water marine deposits and its uppermost sand is a gas reservoir. Both Miocene and Upper Oligocene gas appear to be biogenic methane similar to that found up-dip in Mississippi and in coastal Alabama. The methane source is from interbedded lignites located within this interval. Reported production from the sands has ranged between 100 and 600 thousand cubic feet per day (3-18 thousand cubic meters per day). The overall geologic framework is presented with particular emphasis placed on illustrating the depositional environments and trapping mechanisms associated with these shallow gas reservoirs. These mechanisms are mainly stratigraphic in nature with a minor structural component in some areas.

Changing Patterns of Ownership and Control in the Petroleum Industry: Implications for the Market for Oil and Gas Leases in the Gulf of Mexico OCS Region, 1983-1999.
Has consolidation of ownership and control in the petroleum industry reduced the extent of competition for or lowered the value of oil and gas leases on the Gulf of Mexico OCS?
Neither aggregate measures used by economists to analyze concentrated market and industry structures, nor patterns of joint bidding and cooperation among firms active in the offshore Gulf of Mexico suggest either a decrease or a deficiency in the competitiveness of the lease sales held by the U.S. Minerals Management Service (MMS). Whether leases acquired at the sales, or production by firms bidding for leases, are used as the base of the concentration measures, they indicate a competitive industry bidding for leases in a competitive market.
The effects of mergers are not reflected in the trends observable in these measures over time. More recent mega-mergers are only reflected in the last two or three years of the data series analyzed, but their effects do not change the quantitative measures of the concentration of the industry or lease market. Comparing major and non-major companies as defined by EIA criteria does not indicate significant differences. Similarly, an analysis of patterns of bidding by those firms on MMS' Restricted Bidders List does not suggest non-competitive behavior, although an analysis of the criteria stipulated for compiling the list raises questions about the list's relevance and rationale.
Effects of mergers were analyzed following two complementary approaches. In the first, leases acquired during the 1983 to 1999 period were divided into groups based upon merger and acquisition experience. Over the entire time period the comparisons indicated that leases acquired by firms without merger and acquisition experience elicited significantly higher bids than those acquired by firms with merger and acquisition experience. However, if the leases were subdivided into those acquired during the 1983 to 1989 period, and those acquired in the 1990 to 1999 period, the differences became insignificant in the later period.
Following the second approach entailed making comparisons between majors and non-majors and between those firms listed on MMS' Restricted Bidders List and those not on the list. These comparisons showed the same pattern of significant differences in the 1983-89 period weakening in the 1990-99 period for the financial variables measuring the average value of bids. However, the structural variables measuring the number of bidders and the number of bids per lease showed consistent, significantly lower, values for restricted bidders in both time periods.
Econometric analyses were also applied to data on lease sales in the U.S. Gulf of Mexico OCS region in order to incorporate other relevant factors into the analysis. The same two approaches were followed. In the first, regression equations were estimated for each of the groups of leases, referred to previously, to identify potential effects of mergers and acquisitions on the mean value of high bonus bids, along with other hypothesized determinants, such as: intensity of competition, extent of competition, type of bid, lease location/water depth, economic conditions, and structural changes in the E&P industry. A Wald coefficient restriction test was applied to the regression results to ascertain differences in coefficients in the equations.
The parameters designated as fixed effects (intercepts) were significantly different in magnitude among the groups. The differences suggest that the relative change in the mean value of high bonus bids for OCS leases, ceteris paribus, was relatively smaller for leases in which participating bidders include a firm or firms with M&A experience during the period 1983-1999, when other factors have been accounted for.
This result could be interpreted either as suggesting these firms were able to exercise some degree of oligopsony power, or as suggesting that they possessed better information or had more leasing experience, which enabled them to bid more efficiently. Since measures of competition were not significantly different, the second option seems more plausible.
In the second approach, a set of interactive dummy variables was employed to define eight combinations of: 1) type of bid (joint or solo), 2) existence and extent of competition (ex post) 1 in bidding, and 3) firm size, (using the major/non major or the restricted bidder/unrestricted bidder classifications as proxies for firm size). Merger and acquisition experience was included in the regression equation and had the same significant, negative relationship as in the first model.
In general, both econometric approaches led to findings that are consistent with other studies and theoretical expectations. Both also show that as ex post competition increases, the average value of the high bonus bids increases and this is true regardless of the mergers and acquisition experience of the participants winning the lease. Similarly, the study shows that joint bidding for leases does not lead to anticompetitive bidding outcomes, again regardless of the M&A status of the bidders. However, taking account of the effects of the other intervening factors that could be expected to affect the value of high bids, the econometric analysis suggests that bidders with M&A experience paid less than bidders without M&A experience for OCS leases.

On the Vulnerability of the Oil and Gas Industry to Oil Price Changes.
Previous studies of oil-price economic activity relationships are dominated by macro-level examination of price effects. This study examines the effect of shocks in oil price and its volatility on the oil and gas extraction industry using a Vector Auto-Regressive (VAR) approach. The results show that, in the short-run, positive price and volatility shocks lead to significant increases in oil and gas activities. However, in the long-run, the industry behaves much like the rest of the U.S. economy--price and volatility shocks produce small or insignificant effects.

A Dynamic Estimation of Total Energy Demand for the Southern States.
Few studies have examined in-depth the dynamics of energy consumption within regions or states in spite of the known differences in consumption patterns within nations. To adequately plan and forecast future energy needs and formulate conservation policies, states or regions need basic information such as income and price elasticities, consumtion patterns, etc. Here we estimate the energy demand needs of the 16 states that belong to the Southern States Energy Board (SSEB) as a first step toward assessing future demand. A dynamic panel data framework is used to examine the long-run adjustment patterns. The preferred model shows a process of dematerialization over time. Per capita energy demand over time for the south is found to be relatively inelastic with respect to all the variables and more so for price (-0.32) than income (0.40). The level of income at which per capita energy consumption is maximized is $31,623 (in 1995 dollars). Six of the 16 states in the SSEB are found to have reached or surpassed this level of income.

Resource Allocation Decision Modeling for a Louisiana Public Benefit Fund Program.
A simulation model is developed to value energy efficiency improvement programs in Louisiana proposed to be delivered through a Public Benefits Fund. A uniform 1 mill/kW h non-bypassable surcharge on the electric rates of all electricity users is proposed to be distributed for low-income bill assistance, low-income weatherization, and energy efficiency programs across the residential and commercial sector of Louisiana. The economic and environmental impact of the energy improvement programs is coupled to a stochastic linear program to specify the resource allocation subject to policy and system constraints. The model is illustrated through a realistic policy scenario.