Regulatory Remedies to the Common Pool: The Limits to Oil Field Unitization

Abstract

We examine the potential inability of voluntary unitization to remedy common property losses associated with oil field development. Unlike the traditional literature, we show that if the field contains two (or more) substances that differ in kind (like oil and gas), then it is possible that non-unitized forms of ownership and operation (with conflicted production incentives) may dominate unitized development of the resource. More specifically, it may be impossible to identify any plan of unitized development that is not pareto-dominated by initial endowments or other non-unitized production arrangements which the parties might devise. These results cast the role of the regulatory agency in a new light. Whereas compulsory unitization has tended to be viewed as a uniformly helpful form of outside influence that succeeds by reducing or overcoming the deadweight cost of bargaining, from our perspective it could also be seen as forcing on the parties a "solution" that unavoidably harms one or more of them.