Tuesday, June 27, 2017
3:30pm - 4:15pm, “Relinquishing Riches”
Thomas Covert (University of Chicago)
Paper joint with Richard Sweeney (Boston College)
Most oil and gas reserves in the United States belong to private landowners. To develop their resources, landowners must partner with exploration and production companies, who compete imperfectly for partnerships and are better informed than landowners about the value of mineral reserves. As a result, landowners may capture only a fraction of the surplus created by the assets they own. To date, quantifying the division of surplus has been hindered by the fact that most negotiated contracts between land owners and E&P companies are not publicly recorded. We overcome this limitation by studying recent oil and gas development on lands governed by the Texas Relinquishment Act of 1919, which left the state as a part-owner on thousands of private mineral deposits. Using this unique setting, we quantify the division of surplus between Texas landowners and E&P companies, finding that landowners captured half of the surplus generated on their properties during the recent shale boom. To put this performance in context, we compare these negotiated contracts to contracts for nearby state-owned lands which were allocated to E&P companies by auction. Auctioned contracts and negotiated contracts generated similar total surplus, but the State of Texas captured more of this surplus through auctions than private land owners did through negotiation. These results suggest that private landowners in Texas could have captured hundreds of millions of dollars in additional revenue over the past decade had they contracted via auction instead of negotiation.
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