Property Rights, Leases, Competition and Regulation in the Development of U.S. Shale Resources

Duke University, Durham NC

Investigators

Abstract

The recent boom in shale oil and gas extraction has been one of the most important developments in the U.S. energy market in the past decade. While many researchers are studying the impact and functioning of shale oil and gas markets, the proposed research aims at studying a new and important aspect regarding the leases on private as well as publicly-owned land which exploration firms acquire for their shale gas extraction activity. Given that the regulatory infrastructure in many states is not well developed for this new industry, individually negotiated lease agreements become de facto regulatory tool in this industry, but little is known about how they perform in terms of standard economic criteria. By analyzing the interplay between private negotiations of lease clauses, government regulation, and market power, the proposed research will inform ongoing legislative debates about the best way to regulate drilling activity. Moreover, it will contribute to a more general economic discussion about the value of individual negotiations versus top-down regulation in mitigating potential negative externalities of business activity. The investigators will use novel datasets to analyze questions central to the increased interaction between residential populations and oil and gas extraction activity due to recently developed horizontal drilling techniques. Three of the proposed projects will provide an integrated picture of the development of various activities surrounding affected properties. These projects are focused on measuring the value landowners and exploration companies place on various lease clauses, their respective abilities to bargain for such clauses when negotiating leases, the roles that regulation and competition for access to minerals play in such negotiations, and the impact of leasing and drilling on housing markets. The fourth and final project will focus on the interplay between firm competition and regulation in oil and gas lease auctions held by the federal and state governments. It will make use of competitive auction data to infer the implied costs of recent, and hotly-debated, changes in the regulation of drilling and exploratory activity. The project will also provide a guide to governments holding such auctions about better ways to design these sales.