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Evaluating Split Estates in Oil and Gas Leasing

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  • Timothy Fitzgerald

Abstract

Taking advantage of randomly assigned federal mineral rights, this paper establishes the discount that mineral developers place on oil and gas leases with divided ownership. Results of 53 bimonthly federal oil and gas lease auctions in Wyoming between February 1998 and October 2006 are examined. Bidders discount split estate by 11% to 14% on average, but by as much as 24% for more expensive leases. Impacts of multiple ownerships and additional leasing stipulations are also explored. This discount is interpreted as an expectation of transaction costs incurred in obtaining surface access, so total costs remain unaffected on average.

Suggested Citation

  • Timothy Fitzgerald, 2010. "Evaluating Split Estates in Oil and Gas Leasing," Land Economics, University of Wisconsin Press, vol. 86(2), pages 294-312.
    • Handle: RePEc:uwp:landec:v:86:y:2010:i:2:p:294-312
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    References listed on IDEAS

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    1. Wiggins, Steven N & Libecap, Gary D, 1985. "Oil Field Unitization: Contractual Failure in the Presence of Imperfect Information," American Economic Review, American Economic Association, vol. 75(3), pages 368-385, June.
    2. Libecap, Gary D & Smith, James L, 2002. "The Economic Evolution of Petroleum Property Rights in the United States," The Journal of Legal Studies, University of Chicago Press, vol. 31(2), pages 589-608, June.
    3. Ryan Kellogg, 2011. "Learning by Drilling: Interfirm Learning and Relationship Persistence in the Texas Oilpatch," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(4), pages 1961-2004.
    4. Chouinard Hayley H & Steinhoff Christina, 2008. "Split-Estate Negotiations: The Case of Coal-Bed Methane," Review of Law & Economics, De Gruyter, vol. 4(1), pages 233-258, July.
    5. Mitch Kunce & Shelby Gerking & William Morgan, 2002. "Effects of Environmental and Land Use Regulation in the Oil and Gas Industry Using the Wyoming Checkerboard as an Experimental Design," American Economic Review, American Economic Association, vol. 92(5), pages 1588-1593, December.
    6. Libecap, Gary D & Wiggins, Steven N, 1985. "The Influence of Private Contractual Failure on Regulation: The Case of Oil Field Unitization," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 690-714, August.
    7. Gary D. Libecap, 2009. "Chinatown Revisited: Owens Valley and Los Angeles--Bargaining Costs and Fairness Perceptions of the First Major Water Rights Exchange," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 25(2), pages 311-338, October.
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    Cited by:

    1. Collins, Alan R & Nkansah, Kofi, 2013. "Divided Rights, Expanded Conflict: The Impact of Split Estates in Natural Gas Production," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150128, Agricultural and Applied Economics Association.
    2. Bugden, Dylan & Kay, David & Glynn, Russell & Stedman, Richard, 2016. "The bundle below: Understanding unconventional oil and gas development through analysis of lease agreements," Energy Policy, Elsevier, vol. 92(C), pages 214-219.
    3. Karen Maguire, 2013. "Drill Baby Drill? Political and Market Influences on Federal Onshore Oil and Gas Leasing in the Western United States," Economics Working Paper Series 1401, Oklahoma State University, Department of Economics and Legal Studies in Business, revised Apr 2013.
    4. Vissing, Ashley, 2015. "Private Contracts as Regulation: A Study of Private Lease Negotiations Using the Texas Natural Gas Industry," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 44(2), pages 1-18, August.
    5. Jeffrey Rous & Vicki Oppenheim & Myungsup Kim & Matthew Fry & Chetan Tiwari & Murray Rice, 2020. "Evaluating determinants of shale gas well locations in an urban setting," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 65(3), pages 645-671, December.
    6. Richard G. Newell & Brian C. Prest & Ashley Vissing, 2016. "Trophy Hunting vs. Manufacturing Energy: The Price-Responsiveness of Shale Gas," NBER Working Papers 22532, National Bureau of Economic Research, Inc.
    7. Fitzgerald Timothy, 2012. "Natural Resource Production under Divided Ownership: Evidence from Coalbed Methane," Review of Law & Economics, De Gruyter, vol. 8(3), pages 719-757, December.
    8. Ilia Murtazashvili & Ennio E. Piano, 2019. "Governance of shale gas development: Insights from the Bloomington school of institutional analysis," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 32(2), pages 159-179, June.
    9. Eric Lewis, 2019. "Patchwork Policies, Spillovers, and the Search for Oil and Gas," American Economic Journal: Economic Policy, American Economic Association, vol. 11(1), pages 380-405, February.

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    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development

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