ACCESS NUMBER: 18178 

STUDY TITLE: Capital Investment Decision Making and Trends: Implications on 

Petroleum Resource Development in the U.S. Gulf of Mexico 

REPORT TITLE: Capital Investment Decision Making and Trends in Petroleum 

Resource Development in the U.S. Gulf of Mexico 

CONTRACT NUMBER: 1435-01-99-CA-30951-18178 

SPONSORING OCS REGION: Gulf of Mexico 

APPLICABLE PLANNING AREA: Western, Central, Eastern 

FISCAL YEARS OF PROJECT FUNDING: 2005, 2006 

COMPLETION DATE OF REPORT: December 2006 

COSTS: FY 2005: $9,002.06; FY 2006: $13,555.94; CUMULATIVE PROJECT COST: 

$22,558.00 

PROJECT MANAGER: M.J. Kaiser 

AFFILIATION: Louisiana State University, Center for Energy Studies 

ADDRESS: Energy, Coast & Environment Bldg., Nicholson Extension, Baton Rouge, 

Louisiana 70803 

PRINCIPAL INVESTIGATOR: M.J. Kaiser 

KEY WORDS: Gulf of Mexico; exploration; production; capital expenditures; reserves; 

oil; natural gas 

BACKGROUND: Many factors impact the demand for and supply of oil and natural 

gas, influence how and where energy companies invest their capital, and determine the 

manner in which countries compete to attract foreign investment. World oil supply 

derives from the investment decisions of individual companies, the political decisions of 

countries in regard to licensing and degree of foreign investment, and a multitude of 

variables that influence system dynamics, including price, inventory levels, geopolitics, 

market psychology and manipulation, OPEC policy, exchange rates, unexpected 

events, and resource availability. 

OBJECTIVES: The purpose of this report is to examine the factors that impact the oil 

and gas exploration and capital markets, and to outline the primary elements that 

influence the design of fiscal regimes used in exploration and production (E&P) 

agreements. 
ACCESS NUMBER: 18178 

DESCRIPTION: We begin with a general overview of the oil and gas industry and 

product demand and supply, provide background information on oil and gas resources, 

and describe the defining characteristics of exploration and capital markets. The factors 

that impact supply and demand, investment decisions, and country competitiveness are 

then reviewed. We conclude with a summary outline of the fiscal systems used in the 

exploration and production industry. 

SIGNIFICANT CONCLUSIONS: Exploration and production activity cannot be 

explained solely on the basis of geology. Politics, economics, technology, regional and 

global conditions all act to preclude, foster, or inhibit E&P activity and capital 

investment. E&P activity varies with a country’s demand for crude oil and natural gas 

within its border, as well as the desire to export oil and gas as a means of gaining 

foreign exchange. When the oil industry is in a state of “over supply-low prices,” 

companies are more reluctant to invest capital to seek/acquire new exploration sites; 

when the industry is in a state of “under supply-high prices,” companies more 

aggressively seek out exploration opportunities. Increasingly, oil and gas companies will 

be competing with NOCs to secure exploration acreage, and although there is yet to be 

significant partnering between the two parties, the survival of oil and gas companies rely 

on access to resources, and so movement in this direction may be inevitable. 

The U.S. continues to attract a disproportionate share of investment capital in the oil 

and gas sector because oil is found at the market place, can be developed with low cost 

infrastructure, and can be brought on-line in a short period of time. The political risk in 

the U.S. is small, or negligible, and the potential for commercial discovery is still 

considered strong. As long as these conditions continue to hold, capital will continue to 

flow to the sector. 

STUDY RESULTS: The oil and gas industry is far too complex and dynamic for simple 

cause and effect relationships to be developed to explain the nature of capital 

investment or the terms employed in a country’s fiscal regime. The structure of fiscal 

regimes depend upon many interdependent non-causal factors such as the reserve 

base and economic strength of the country, oil supply balance, oil prices, evolution of 

political systems and historic relationship between the industry and the country, field 

maturity and development stage, regional demand, the country’s desire for foreign 

capital, geopolitical motivations, and many other variables. Countries with low 

exploration risk and high prospectivity are generally expected to take a high proportion 

of economic rent, while countries with high exploration risk and low prospectivity must 

usually offer a larger share of rent to encourage investment. 

STUDY PRODUCT: Kaiser, M.J. and A.G. Pulsipher. 2006. Capital Investment 

Decision Making and Trends in Petroleum Resource Development in the U.S. Gulf of 

Mexico. U.S. Dept. of the Interior, Minerals Management Service, Gulf of Mexico OCS 

Region, New Orleans, La. OCS Study MMS 2006-064. 134 pp.