Amber, isn’t there a free rider problem? Suppose there are two producers in a basin where prices are low because supply exceeds demand. If I understand correctly both producers will benefit from a new pipeline that takes away some of the excess gas. Isn’t the rational decision for both producers to wait until the other one builds the pipeline? If so, how does this get resolved in practice?
Btw I enjoy your posts very much. You’re making some unique points that I haven’t read anywhere else (eg there’s no such thing as pure associated gas).
Thanks! And absolutely, there is a prisoner's dilemma behind which producers take out pipeline capacity, and that's another reason producers are not the natural party to backstop pipeline capacity. What Antero did (backstopping capacity that pretty much only sources their gas) is one way to mitigate this, although the downside to that is that Antero can't capture the value of the capacity other than by producing more (whereas more liquid capacity could have value on its own).
Over time, I think consolidation will mitigate this, because a producer that accounts for more of the basin's production will reap more of the aggregate benefits. But the bigger way it gets resolved is by consumers contracting for pipeline capacity, which was the case for most of history.
Amber, isn’t there a free rider problem? Suppose there are two producers in a basin where prices are low because supply exceeds demand. If I understand correctly both producers will benefit from a new pipeline that takes away some of the excess gas. Isn’t the rational decision for both producers to wait until the other one builds the pipeline? If so, how does this get resolved in practice?
Btw I enjoy your posts very much. You’re making some unique points that I haven’t read anywhere else (eg there’s no such thing as pure associated gas).
Thanks! And absolutely, there is a prisoner's dilemma behind which producers take out pipeline capacity, and that's another reason producers are not the natural party to backstop pipeline capacity. What Antero did (backstopping capacity that pretty much only sources their gas) is one way to mitigate this, although the downside to that is that Antero can't capture the value of the capacity other than by producing more (whereas more liquid capacity could have value on its own).
Over time, I think consolidation will mitigate this, because a producer that accounts for more of the basin's production will reap more of the aggregate benefits. But the bigger way it gets resolved is by consumers contracting for pipeline capacity, which was the case for most of history.