Economic Analysis of Oil Exploration by q-Theory

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Extractive activities of oil and natural gas can be regarded as investment from the point of firms. One needs to investigate the relationship between the value of the firm and its values of assets including reserves underground.First, this study builds a valuation model of the firm by relating it to the values of underlying assets. In particular, this study examines how the value of reserves underlying the firms are affected by crude oil priceSecond, this study conducts an empirical research by using corporate data. By choosing 20 some U.S.energy firms, I investigate how extractive investment is related to the value of the firms or cash flow. U.S.energy firms in the 1980s are characterized by the acquisitions of reserves and other assets more through M&A than extractive investment. The empirical part investigates how M&A,vertical integration, and crude oil price are related. I show that the value of reserves are positively related to crude oil price, particular of foreign reserves. I also show that vertical integration under the tight price regulation enhances the value of the firm, hence promotes extractive investment.Third, this study sttempts empirical studies using Russian energy firms. Due to the collapse of the USSR,data base was discontinued, which makes the attempt fail. In stead of pursuing this line of research, I plan to analyze the Russian oil industry with focusing on more general profile. This will be completed around 1997 when I successfully gather data.