Chih Liu

1. Resource-Based and Property Rights Perspectives on Value Creation: The Case of Oil Field Unitization(Kim and Mahoney 2002) Chih Liu

2. Objective and Contribution Realized Value • Whyrealized 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. ? Potential Value

3. RBV versus PRT • Resource-based view • Seeks to understand sources of competitive advantages from owning certain resources • Assumes resources are secured due to • Inherent attributes • third-party enforcement • Self-enforcing agreement • Property Right theory • Relaxes the implicit assumptions of RBV • Deals with the processes whereby property rights are established

4. 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

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

6. Oil Field Unitization (OFU) • Inefficiency in contracting for OFU results from the joint condition of • Multiple landowners • The migratory nature of oil • Important variables for efficient extraction • The rate of production • The location of the wells • Individual competitive drilling goes against • Finding optimal location • Maintaining efficient extraction rate • Therefore, OFU is the most complete solution. But why is this solution not realized?

7. Impediments to Contracting • Many economic aspects of contracting situation • Length of contract • Once-and-for-all contract, etc. • Asymmetric information • Leads to diverging valuations of contracting parties’ shares • Imperfect information and strategic holdout • Competitive drilling → Negative externalities • Prisoner’s dilemma

8. Impediments to Contracting • Interest-group theory • Eggertsson (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

9. RBV in terms of PR • 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 relational • The interdependent nature of resources utilized in a competitive environment

10. PR Complementarity btw RBV and PR RBV • “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.”

11. 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.

12. Conclusions • 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.”