ABSTRACT
The matter of external damages aside, and given the extension of surface private property rights to underlying minerals, the conservation problem in petroleum production arises out of the joint effects of two conditions: (a) the existence of two or more owners of operating interests in the surface overlying a single reservoir and (b) the fluid, hence migratory, nature of reservoir contents.1 These two conditions create the incentive, which we have symbolized in the negative marginal user cost of competitive extraction, to drill wells more densely, to extract fluids more rapidly, and to allow to escape or to leave unrecovered more gas and oil than is appropriate from the point of view either of the operators as a whole or of society at large. Both conditions are essential to the conservation problem; neither alone would create it. If either there were one owner of operating interests in each reservoir or the contents of a reservoir were solid, then there would be no opportunity for drainage across property lines and the incentive symbolized in the negative marginal user cost of competitive extraction would be nonexistent. Each operator would then bear the full cost burden of unrecovered minerals and enjoy the full income benefits of extraction properly distributed over time. Consequently, given competitive markets, each operator in pursuing his own economic interest would choose the well density, rate of extraction, and degree of ultimate recovery that would maximize expected net benefits to society; in other words, each operator would voluntarily practice true conservation.
