An economic analysis of unitized and non-unitized production

Wasteful production of oil and gas can result when access to a reservoir is held by more than a single producer. Severe economic losses arise because of over-drilling, excessive storage, improper well-spacing, and intertemporal inefficiency as well as damage to the natural drive of the field which can reduce ultimate recovery from the reservoir. Reservoir-wide unitization has long been viewed as the ideal solution to this "common pool" problem. Unitization can be accomplished through private agreements, although in many cases these contracts are difficult to secure because of bargaining costs and hold-out problems. In many cases agreements can be reached only if unitization is compelled by law. We develop a dynamic economic model of reservoir production to analyze unitized and non-unitized reservoirs. The model uses optimal control theory to generate predictions about depletion rates and total recovery under these two regimes. Reservoir simulations are used to examine some predictions of the model and show that production from unitized reservoirs is biased toward the future compared to non-unitized reservoirs and that the initial overproduction under the rule of capture can be significant.