Risk Reducing Technology and Quantity Competition: The Seismic Story

Abstract

The new millennium has witnessed large scale mergers of oil companies, thereby bringing about a more concentrated industry. Standard & Poor's (2000) classification included 33 international integrated companies, while Hoover's online (2000) classification lists 50 international integrated companies as the current constituents of this industry. Of particular interest to this paper is the creation of BP plc (1998) (formerly BPAmoco), ExxonMobil Corporation (1999), ChevronTexaco Corporation (2001) and the Royal Dutch/Shell Group of Companies. The purpose of this paper is to develop the argument that these mergers are a particular form of response to aggressive or excessive exploration behaviour by competing major players, as a means of maintaining their relative standing in the industry. Such relative positioning is of particular importance in an industry where, seven companies, (five American [Exxon, Mobil, Amoco, Texaco and Chevron], one British [BP] and one Anglo-Dutch [Shell]) have long dominated the industry, giving rise to what may be thought of as a mature oligopoly. This paper argues that the mergers of this period were a result of a co-operative move to address detrimental outcomes from competitive behaviour between these major players, particularly for scarce oil reserves. Such competition reduces industry outcomes in terms of profit and players prefer to merge rather than through a competitive shake out that weakens their relative industry standing. Such periodical consolidations have been an integral part of the dynamics of the petroleum industry, particularly in times of excess capacity, leading to price competition and a decline in overall industry profits. The second major theme that this paper explores is that of the role of technology in causing these outcomes. In particular, the paper traces the development and adoption of newer process technology (cost-reducing technology), specifically 3D seismology. The paper strongly argues that the underlying competitive behaviour between major players in the industry promoted aggressive use of technology, particularly in the late 1990s. Such competition has brought about the presence of excess capacity, followed by intense price competition that has led to worsening outcomes, for which mergers are a solution. Section II examines the theoretical framework that provides a context to the arguments of this paper. Steindl's (1954, 1976) analysis of the dynamics of imperfect competition is characterised chiefly by technological change or progress coupled with the presence of excess capacity, both of which are pertinent to the argument. Section III outlines the argument in a concrete manner with reference to an industry specific hypothesis, recording the details of the facets upon which the argument hinges. Section IV is essentially a synthesis of the various elements of the arguments and presents an analysis of industry dynamics in the context of a technological change, while Section V consists of concluding remarks.