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Resource-Based and Property Rights Perspectives on Value Creation: The Case of Oil Field Unitization (Kim and Mahoney 2002 ). Chih Liu. Objective and Contribution. Realized Value. Why realized value creation can be less than potential value creation?

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

Chih Liu

slide2

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

slide3

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
overview of resource based theory
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
slide5

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

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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?
slide7

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
slide8

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
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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
slide10

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.”
summary and discussion
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.
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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.”
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