Simulating the effect of economic and policy incentives on natural gas drilling and gross reserve additions

A supply model of natural gas reserve additions is developed and estimated using data on 18,000 new wells drilled in West Virginia between 1977 and 1987. The model is used to quantify the responsiveness of drilling effort and gross reserve additions to changes in the expected wellhead price, taxes, resource depletion and reserve-life index. All the results of the hypotheses tested are in line with conventional wisdom, and their consistency suggests that the model structure offers a useful approach to modeling resource supply in a mature geologic setting like West Virginia. The model structure is well-suited for regions where drilling activities and outcomes cut across formations of varying depth and is more flexible than aggregate models. The model has the capacity to evaluate the response of activity within individual geologic series to prices, taxes and costs.