Frack to the future: What enticed small firms to enter the natural gas market during the hydraulic fracturing boom?

Rebecca J. Davis and Charles Sims

Energy Economics, 2019, vol. 81, issue C, 960-973

Abstract: The shale gas boom of the early 2000s saw the highest and most volatile natural gas prices and production in history. Advances in horizontal drilling, 3-D seismic imaging, and hydraulic fracturing made it highly profitable for firms to produce large quantities of shale gas. This period was also characterized by a shift in market structure. The U.S. natural gas market was historically defined by large firms, but a large number of small firms began entering the market after 2000. While small firms made a negligible contribution to natural gas production during the shale gas boom, their entry may signal overcapitalization, productivity growth, and increased responsiveness of natural gas markets to exogenous shocks. We develop a real options model of market entry and exit and use data on natural gas drilling activity to test three potential explanations for small firm entry during the boom: 1. technological advances, 2. land lease speculation, and 3. regime change in natural gas prices. Our analysis provides mixed support for the first explanation but strong support for the last two.

Keywords: Natural gas; Market structure; Regime switching; Uncertainty; Irreversibility (search for similar items in EconPapers)
JEL-codes: L11 L71 O33 Q31 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:81:y:2019:i:c:p:960-973

DOI: 10.1016/j.eneco.2019.05.025

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