The Finding Cost of Natural Gas: Technological Change versus Resource Depletion

This study provides an empirical analysis of the extent to which ongoing technological change has offset the effect of ongoing depletion on the cost of finding additional reserves of natural gas. In the process, we develop a new index of technological change for exploration and development (E&D) activities in the natural gas industry by identifying new technologies by year of diffusion using a detailed analysis of technical trade publications. Counting the number of technological diffusions in each year, one gets an indication of the rate of technological advance over time. The cumulative total is an indicator of the level of technology. Next, we motivate the inclusion of our measure of the current state of technology in the production function and the implied cost function for finding natural gas. This is done using alternative indices of capital obtained from the quality ladders and varieties models in the recent "endogenous growth" literature. Our estimated cost equations isolate the separate effects of depletion and technological improvement on the finding cost for natural gas. Counter factual simulations based on the cost functions suggest that technological change played a major role in allaying what would otherwise have been a sharp rise in production costs as additional reserves became harder and more expensive to find. Hence, our analysis provides empirical evidence of the common claim in the resource literature that technology has largely counteracted increasing resource scarcity in at least one nonrenewable resource sector, the natural gas industry.