Concentration Trends in the Gulf of Mexico Oil and Gas Industry.

• Author: Mason, Charles F.
• Position: Report

1. INTRODUCTION

   During his illustrious career, Morris Adelman devoted considerable time and energy to thinking about the structure of oil markets, at both the international and national level. (1) A recurring theme in these analyses is the evolution of the oil market, and in particular the tendency towards greater competition over time. (2) As an illustration, Adelman (1977, pp. 1-2) notes that the share of the global oil market attributable to the four largest oil companies fell by nearly 20% between 1950 and 1969. Contemporary public policy was less optimistic about the trend towards greater competition; for example, the staff of the FTC described the petroleum industry as "characterized by high barriers to entry" (Erickson, 1977, p. 55).

   The question of the potential impact of market power and concentration does not just apply to oil and gas production. To the extent that local or regional markets are characterized by high concentration, this can have implications for input markets. Adelman (1972, p. 201) anticipated this possibility, when he observed in reference to the oil service industry that "[t]he offshore drilling industry is perhaps the biggest single part of the complex." In this regard, a particularly important market segment for offshore oil and gas is the Gulf of Mexico: As Figure 1 illustrates, crude oil production from federal leases in the Gulf of Mexico has accounted for 15 and 30% of domestic US production over the past 20 years. (3) And while the share of US production attributable to the Gulf of Mexico has fallen off in the past few years, its role remains important: this reduced share is almost surely the result of the recent boom in tight oil production, which is particularly light. Since US refineries are geared to process heavier crude slates, this new source of crude has to be blended with heavier crude, the most economic source thereof comes from the Gulf of Mexico. (4)

   A second theme found in Adelman's work relates to the recurring push to capture oil companies' profits, either via a windfall profits tax or a move to force divestiture (Adelman, 1972, 1977). In his view, such efforts are ill-directed, in part because of the general trends towards increasing competition. Echoes of these issues are also present in the Gulf of Mexico oil and gas industry. There the share of output attributable to the so-called "Seven Sisters," firms that crafted the collusive Achnacarry agreement nearly 90 years ago, has fallen sharply over the past 20 years. (5) Early on, firms that were part of the Seven Sisters controlled a considerable fraction of oil production, in both shallow and deep water. The shares attributable to these firms in 1996 were roughly 50% in shallow water, and slightly more than 80% in deep water. However, these shares had eroded markedly by 2014, falling to about 20% in shallow water and 55% in deep water. The story is quite similar for gas. The upshot is that over time, the significance of these major oil and gas companies has diminished in the Gulf of Mexico, consistent with the overall portrait of emerging competition.

   In this paper I flesh out these impressions, providing calculations of concentration statistics for multiple metrics of importance to the oil and gas industry in the Gulf of Mexico. I start by describing annual concentration levels in lease markets between 1954 and 2014. I then discuss trends in drilling, in both shallow water (between 2007 and 2013) and deep water (between 2009 and 2013). I then discuss concentration in oil and gas production, for the Gulf as a whole, as well as for both shallow and deep water. Here the data allows analysis of monthly statistics. In general, the evidence points towards decreasing concentration over time. Finally, using the monthly observations on concentration for oil and for gas production, I undertake a time series analysis. This latter inquiry allows me to estimate the long-run levels of concentration; for each segment, these long-run estimates fall in the range deemed to be "unconcentrated" by the U.S. Department of Justice.

   I start the discussion in section 2, where I present an overview of the oil and gas industry in the Gulf of Mexico. I then proceed to a graphical examination of concentration patterns in section 3. I present results for three sectors in the Gulf of Mexico oil and gas industry: leasing, drilling and production. The latter data is sufficiently detailed as to allow a deeper empirical investigation, which I undertake in section 4. Here I evaluate the time series properties of these data, paying particular attention to the implied long-run level of concentration. In section 5 I offer a discussion of these results; here I offer some thoughts on the roots of declining concentration. Concluding remarks are offered in section 6.

2. AN OVERVIEW OF THE GULF OF MEXICO OIL AND GAS INDUSTRY

   Oil and gas operations have been active in the Gulf of Mexico since the 1940s (Energy Information Administration, 2005). In the intervening years, exploration steadily increased; as indicated in Figure 2, crude oil production in the Gulf had reached 300 million barrels by the early 1980s. This pattern accelerated over the next few decades, with output levels exceeding 500 million barrels by the turn of the century. This rise in production was echoed by the increasing role played by Gulf oil production, as a share of total US output, with shares exceeding 20% by the late 1990s. Referring back to Figure 1, this increase came at a time when total US production was declining fairly rapidly, underscoring the significance of the Gulf. The importance of Gulf of Mexico resources is also indicated by a comparison of the fraction of US production attributable to this basin. As with reserves, this fraction increased markedly after the mid-1990s, reaching roughly 20% by the early part of this century. It is also noteworthy that the fraction of US production arising from the Gulf of Mexico consistently exceeds the fraction of US reserves found in the Gulf; this implies that Gulf reserves are being extracted more rapidly than are onshore reserves.

   During this period, there was a clear migration towards deeper waters. As illustrated by Figure 3, crude oil production from waters less than 600 feet in depth has fallen by about half over the past 20 years or so, with production from deeper waters rising steadily. This increase in production from deeper waters has been sufficient to outweigh the falloff in shallower water production, with the net effect that total production has remained roughly constant at about 40 million barrels per month--with the notable exceptions in August 2005, in the aftermath of Hurricane Rita, and in September 2008, following Hurricanes Gustav and Ike (Cruz and Krausmann, 2008; Kaiser and Yu, 2010). One observes a similar pattern with Natural Gas production. As Figure 4 illustrates, production from shallow waters has been steadily declining for the past 20 years, while production from deeper waters increased by roughly a factor of three between 1995 and 2005; by 2010, production levels from the two depth cohorts were quite similar. Overall production levels for gas have generally declined over the period, again with significant temporary reductions in August 2005 and September 2008.

   The initial preference for shallower deposits can be explained by cost differences: while production in shallower waters can be readily accomplished by structures that are fixed to the sea floor; production from platforms in deeper waters "quickly becomes uneconomic" (U.S. Minerals Management Service, 1997, p. 12). However, technological gains lowered costs associated with production from deeper waters to the point that these deposits became economic to exploit over the past 15 years (U.S. Minerals Management Service, 2001). These observations point to deep water resources as increasingly important.

   Exploration and production in the Gulf of Mexico was initially dominated by large oil companies, with the Seven Sisters' shares of 1996 oil production roughly 50% in shallow water and 80% in deep water. One might interpret this data as indicating there were barriers to participation in oil and gas production in the Gulf of Mexico, which could then have implications for the performance of industries related to support services (such as drilling, or labor markets). It could also have implications for bidding for leases, in particular one might worry that winning bids were distorted downwards.

   However, the market shares of the oil majors had eroded markedly by 2014, as Figures 5 and 6 illustrate. Figure 5 shows the fraction of Gulf of Mexico crude oil output produced by firms in the Seven Sisters, in both deep water (production from depths greater than 600 feet) and shallow water (production from depths no greater than 600 feet). (6) Evidently, the share of oil production attributable to these large oil companies had declined to about 20% in shallow water and 55% in deep water by 2014. The story is quite similar for gas. The upshot is that over time, the significance of these major oil and gas companies has diminished in the Gulf of Mexico, consistent with the overall portrait of emerging competition.

   An indication of these trends is conveyed by the number of active participants in various sectors of the Gulf of Mexico oil and gas industry, as Table 1 illustrates. Here, I list the average, standard deviation, minimum and maximum number of firms for leasing, drilling and production in the Gulf of Mexico. For each of the three categories, I list the period on which I base the sample statistics, along with the frequency of the observations. (7) For leasing, I split the observations between early data (taken from the Hendricks and Porter (1992) analysis of offshore leasing between 1947 and 1979, based on both state and federal leasing) and later observations (based on federal leases, taken from the Bureau of Ocean Energy Management, or...