Idle Oil Wells: Half Empty or Half Full?

There are hundreds of thousands of oil and gas wells across North America that are not currently producing oil or gas. Many of these wells have not been permanently decommissioned to meet environmental standards for permanent closure, but left in a inactive state that enables the well to be more easily reactivated. Some of the wells have been temporarily inactive for more than sixty years which begs the question of whether these wells are inactive because of the option value of reactivation or because of the hefty cost of complying with environmental regulations for permanent closure. The goal of this paper is to determine what changes in prices, technology or policy would be needed to see an increase in reactivated or decommissioned wells. Historical data of production decisions from 84 thousand wells and expected recoverable reserves from 47 thousand pools are used to estimate a dynamic discrete choice model of operating state. The estimated structural model then allows us to examine what conditions might push any of the inactive wells out of the hysteresis in which they reside. Jel–Classification: C61, Q32, Q41