Resource-Based and Property Rights Perspectives on Value Creation: The Case of Oil Field Unitization

(Kim and Mahoney and Mahoney 2002)

Chih Liu

Why realized value creation can be less than potential value creation?

Expand the scope of resource-based theory to a business context with frictions in establishing property right (e.g. oil field unitization)

Need to incorporate the role of property rights into the analysis of RBV

to internalize externalities and to solve prisoners’ dilemma problems of common-pool resources.

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Objective and Contribution

?Potential Value

Realized Value

Resource-based viewSeeks to understand sources of competitive advantages from owning certain resourcesAssumes resources are secured due to

• Inherent attributes• third-party enforcement• Self-enforcing agreement

Property Right theoryRelaxes the implicit assumptions of RBVDeals with the processes whereby property rights are established

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RBV versus PRT

Overview of Resource-Based Theory

VRIN – resources that are valuable, rare, inimitable, and non-substitutable can generate economic rents (Barney, 1991)

Peteraf’s four cornerstones framework (1993):

Resource heterogeneity Ex post limits to competition (isolating mechanisms) Ex ante limits to competition Imperfect resource mobility

An oilfield is an area of rock under the ground that is full of oil or gas or both. Oilfields are typically 10-20 km (6-12 miles) wide. Oil is created in a source rock, along with water and gas. Over millions of years, the oil and gas float upwards above the water along a migration path. Oil and gas often rises all the way to the surface of the earth. In other cases, it collects in a reservoir; a rock that has spaces where oil can collect. Sandstone is a good example, in which oil collects in the spaces (pores) between the sand grains. There must also be a trap - a rock structure that forms a seal above and around the reservoir rock. A seal is impermeable - that is, fluids such as oil cannot flow through it. Clay and shale are impermeable and make good seals.

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Oil Field

Source: http://www.seed.slb.com/qa2/FAQView.cfm?ID=878

Inefficiency in contracting for OFU results from the joint condition of

Multiple landownersThe migratory nature of oil

Important variables for efficient extractionThe rate of productionThe location of the wells

Individual competitive drilling goes against Finding optimal locationMaintaining efficient extraction rate

Therefore, OFU is the most complete solution. But why is this solution not realized?

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Oil Field Unitization (OFU)

Many economic aspects of contracting situation

Length of contractOnce-and-for-all contract, etc.

Asymmetric information Leads to diverging valuations of contracting parties’ shares

Imperfect information and strategic holdoutCompetitive drilling → Negative externalitiesPrisoner’s dilemma

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Impediments to Contracting

Interest-group theoryEggertsson (1990) criticizes the implicit assumption that governments will act to minimize transactions costs.Not true of OFU in the US (e.g. Texas)

Number and heterogeneity (Libecap, 1989)

The greater the impediments to contracting when• The larger the number of bargaining parties• The more heterogeneous the bargaining parties

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Impediments to Contracting

RBV in terms of the property right theory

Clarifies the definition of “resources”Specific what kind of utilizations are possible with a particular resources

Property rights are relationalThe interdependent nature of resources utilized in a competitive environment

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RBV in terms of PR

“The more valuable the resources, the more incentives there are to make property rights of resources more precise.”“The more precisely delineated the property rights of resources, the more valuable resources become.”

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Complementarity btw RBV and PR

Summary and Discussion In an economic world of positive transaction costs, a full RB analysis must consider not only whether resources are VRIN, but must also consider the role property rights in value creation

Value creation vs. value distribution, and how they interact

Systems of property rights are, in essence, conduits upon which value-creating activities are implemented so that resources can be channeled to higher yield use.

Asymmetric information and distributional conflicts may limit resources from being channeled to these higher yield uses.

A full resource-based analysis must consider

not only whether resources are valuable, rare, inimitable and non-substitutable but must also consider the role of property rights in (realized) value creation.

“The property rights theory (along with transaction costs and agency theories) will become increasingly prominent in the next generation of resource-based research in strategic management.”

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Conclusions