The Widespread Failure of Production Unitization in US Oil Fields: A Strategic Explanation
This paper examines unitization of oil production in common pool oil fields. We argue that strategic consideration rather than asymmetric information may be the primary reason for the persistent and widespread failure of unitization in U.S. onshore oil fields. It is shown that, despite large gains in field wide rent, unitization may cause losses to the participating leases unless the scale of unitization is sufficiently large. Further, given other firms' decisions on whether to unitize or not, a firm is always better off by staying out. The inability of the unitized unit to capture the gain that it generates, together with the rewarding nature of staying out, may be the primary reason for the continuing and widespread failure of unitization.
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