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Prorationing and its effect on investment in the Canadian oil industry Lee, William Randolph

Abstract

Prorationing is sometimes implemented when the producing capacity of an area exceeds the demand for that output at a price which many producers feel to be "fair" -when this situation occurs the price of course comes under pressure as producers compete with one another to sell their oil. It is in order to avoid such a possibility that operators are sometimes successful in persuading the government having jurisdiction to assume the responsibility of setting up and policing a prorationing plan. Under such a scheme the total demand for crude oil from the area, at the desired price, is alloted among all the producers of the area on a basis related to some measure of each producer's capacity - no producer has any Incentive to lower his price as he would not be awarded any larger share of the market for so doing. In simple words then the name of the game Is price fixing. Since December 1950 such a scheme for "prorationing production to market demand" has been in force in the province of Alberta and is administered by a board created by the provincial government. This practice of prorationing has had a great influence on the manner in which the Canadian oil industry has developed, not only in the province of Alberta (which is by far the largest producer of crude) but in the other oil producing provinces as well (these being mainly B.C., Sask., and Man.). It has in fact encouraged large amounts of excess expenditure to take place in the development of Canada's crude oil resource. Prorationing has encouraged this over expenditure in two ways - first through the maintenance of an artifically high price for crude oil which has encouraged the development of high cost sources at the expense of already existing low cost ones that must as a result suffer "shut-in" capacity, and secondly as a consequence of the regulations governing the method by which the demand is apportioned which has led to the over drilling of oil fields. A third cause of over expenditure have been field regulations outside of the prorationing plan such as provincial legislation dealing with minimum allowed well spacing, the manner in which maximum allowable rates of production for wells have been calculated, and the manner in which lease rights are allowed to be held. Our estimate is that poor field regulations, both inside and outside of prorationing, have led to excess expenditures of some $730 million in the period 1947 to 1965 inclusive. Over expenditure due to prorationing itself has amounted to some $1,000 million. Extensive amendments to the prorationing regulations in 1964 improved these markedly and largely removed them as a source of future waste. Prorationing itself however and the regulations governing the holding of leases remain, and so long as they do serious over expenditures will continue to be made.

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